d.A 

' 


44X802 


OF 
ECONOMIC  THEORY 


By 

SIMON  N.  PATTEN,    Ph.D. 

Professor  of  Political  Economy 

University  of  Pennsylvania 


PHILADELPHIA 

THE  AMERICAN   ACADEMY  OF  POLITICAL  AND  SOCIAL  SCIENCE 

1912 


Copyright,  1912,  by 
THE  AMERICAN  ACADEMY  OF  POLITICAL  AND  SOCIAL  SCIENCE 

All  rights  reserved 


CONTENTS 


PAGE 

INTRODUCTION 1 

I.  THE  DEVELOPMENT  OF  AMERICAN  THOUGHT 4 

II.  THE  PROBLEM 9 

III.  THE  ORIGIN  OF  SOCIALISM 13 

IV.  THE  ECONOMIC  MARX 19 

V.  TYPES  OF  AMERICAN  SOCIALISM 26 

VI.  AN  INTERPRETATION  OF  JOHN  STUART  MILL 31 

VII.  THE  FAILURE  OF  THEORIES  OF  DISTRIBUTION 36 

VIII.  A  RESTATEMENT  OF  THE  THEORY  OF  DISTRIBUTION 41 

IX.  PRACTICAL  APPLICATIONS  OF  THE  THEORY  OF  DISTRIBUTION  47 

X.  BUDGET  MAKING 51 

XL      FAMILY  BUDGETS 57 

XII.  THE  HIGH  COST  OF  LIVING 64 

XIII.  VOLUNTARY  SOCIALISM 70 

XIV.  THE  AVOIDANCE  OF  STATE  SOCIALISM 76 

XV.  THE  MEASURE  OF  PROGRESS 83 

XVI.  THE  OUTLOOK 89 

INDEX . .  .96 


THE   RECONSTRUCTION  OF   ECONOMIC 
THEORY 


INTRODUCTION 

Last  spring  a  fellow  economist  asked  what  I  expected  to  write 
next.  I  replied  "a  book  on  progress."  He  then  expressed  regret 
that  I  was  deserting  economic  theory  and  was  kind  enough  to  say 
that  I  was  one  of  those  who  had  aided  the  advance  of  economic 
thought.  To  this  I  said  that  my  last  book  on  economics  was  a  fail- 
ure, and  having  realized  this  I  resolved  to  write  no  more  books  on  eco- 
nomic theory  until  I  could  see  some  attainable  goal.  We  discussed 
this  point  but  parted  without  agreement.  Soon  after  I  met  a  friend 
who  said,  "I  am  interested  in  the  referendum  and  the  initiative." 
" I  am  not,"  I  replied,  "the  American  people  should  decide  what  they 
want  to  do  before  they  try  to  settle  how  to  do  it. "  "  What  is  the  use, ' ' 
he  retorted,  "of  knowing  what  you  want  until  you  know  how  to  get 
it."  While  I  was  thinking  over  this  conundrum  I  had  a  conversation- 
with  another  friend  over  the  conflict  within  the  Republican  party. 
When  our  differences  became  manifest,  he  said  that  I  was  growing 
conservative  while  he  was  becoming  more  radical.  I  replied  that  the 
real  difference  was  that  he  was  revolutionary  while  I  was  evolutionary. 

These  conversations  led  me  to  realize  that  concrete  problems 
are  shaping  themselves  in  a  way  that  only  better  theory  can  solve. 
Public  opinion  is  not  to-day  what  it  was  ten  years  ago  when  my 
"Theory  of  Prosperity"  saw  light.  There  is  a  new  setting  to  every 
national  problem  and  a  clearer  perception  of  each  issue.  Out  of  it 
must  come  a  thought  development  that  will  force  a  better  industrial 
adjustment. 

My  determination  to  restate  economic  theory  was  strengthened 
by  a  realization  of  the  changes  in  attitude  wrought  by  my  recent 
development.  While  a  student  in  Germany  I  became  imbued  with  the 
German  view  and  came  home  hoping  to  help  in  the  transformation 
of  American  civilization  from  an  English  to  a  German  basis.  Like 
other  returning  students,  I  thought  the  last  word  on  all  subjects  was 
in  German.  This  attitude  led  to  a  wrong  estimate  of  the  contribu- 
tions of  English  economists  and  to  a  neglect  of  the  antecedents  of 

(i) 


2  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

the  ideas  we  were  striving  to  express.  It  is  a  German  axiom  that 
German  thought  is  the  continuous  expression  of  the  best  in  the  world's 
civilization  and  that  in  it  are  to  be  found  the  antecedents  and  basis 
of  a  modern  development.  I  was  carried  away  by  the  brilliancy  of 
this  thought  and  viewed  the  past  as  a  series  of  victories  of  the  Ger- 
manic race.  From  this  concept  my  best  thought  has  come  as  well 
as  that  of  other  American  economists.  But  when  applied  to  eco- 
nomics it  leads  to  a  misinterpretation  of  the  facts.  Economics  is 
English  both  in  its  origin  and  development.  Its  ideas  are  not 
German  either  in  its  recent  or  earlier  development.  German  econ- 
omists have  followed  the  natural  trend  of  German  thought  in  seeking 
economic  origins  in  the  race  history  of  which  they  are  a  part.  This 
limitation  takes  from  their  conclusion  the  weight  American  students 
sought  to  give  them  and  forces  a  reconstruction  of  economic  history 
along  other  lines.  Of  what  consequence  is  Marx's  development 
unless  he  was  a  leader  in  the  evolution  of  thought  and  not  merely  the 
interpreter  of  English  economics  to  the  German  nation?  Assume 
also  that  Germany  is  not  ahead  of  us  in  development  and  her  3,000,000 
socialists  afford  no  indication  that  our  progress  will  bring  a  like 
development.  Are  we  the  pacemakers  in  economic  evolution  or  is 
Germany?  When  this  is  decided  the  dependence  or  independence 
of  American  thought  settles  itself. 

Aside  from  a  German  education  the  potent  influence  in  shaping 
my  career  has  been  the  writings  of  John  Stuart  Mill.  I  have  regarded 
myself  as  his  disciple;  and  while  other  heroes  of  my  youthful  ardor 
sank  beneath  the  horizon  he  remained  the  one  personal  influence 
shaping  my  thought.  In  my  "  Development  of  English  Thought,"  I 
looked  on  him  as  the  high- water  mark  of  Nineteenth  Century  thinking, 
and  believed  that  this  interesting  epoch  ended  with  him.  Were  I  to 
write  the  chapter  on  the  "Nineteenth  Century"  again  I  should  make 
of  him  not  a  goal  but  a  half-way  house  between  the  dogmatic  ration- 
alism of  the  earlier  epoch  and  the  rising  wave  of  sentiment  and  class 
hatred  in  the  new.  Mill  goes  from  logic  to  sentiment  without  being 
conscious  of  the  opposition  between  them  or  of  the  change  going  on 
within  himself.  He  is  a  thinker  becoming  a  socialist  without  seeing 
what  the  change  really  meant.  The  Nineteenth  Century  epoch  ends 
not  with  the  theories  of  Mill  but  with  the  more  logical  systems  of 
Karl  Marx  and  Henry  George. 

The  new  epoch  in  American  thought  begins  with  the  contrast 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  3 

of  rationalism  with  pragmatism.  To  apply  pragmatism  to  economic 
thought  means  to  test  historical  epochs  by  the  results  that  flow  from 
them.  Instead  of  anticipating  changes  and  deducing  social  conse- 
quences from  them,  epochs  are  to  be  studied  subsequent  to  their 
completion.  The  Nineteenth  Century  should  be  judged  by  the  facts 
of  1912,  not  by  the  anticipations  of  those  who  took  part  in  its  progress. 
It  is  not  what  Mill,  Carlyle,  Spencer  or  Marx  thought  would  take 
place  but  what  has  actually  happened  that  should  interest  us.  This 
means  a  change  from  prophecy  and  deductive  laws  to  facts  and 
statistics.  If  we  can  determine  the  truth  of  deduced  anticipations 
by  present  knowledge,  a  new  epoch  is  opened  up  and  fresh  studies 
in  economics  are  needed  to  point  the  way  of  progress. 

In  this  viewpoint  I  may  be  right  or  I  may  be  wrong.  It  is  the 
final  reason  why  I  return  to  economic  theory  and  seek  to  restate  its 
premises  and  doctrines.  Others  must  judge  of  its  success  but  to  me 
it  has  been  a  pleasant  task  to  reopen  seemingly  settled  controversies 
and  to  review  them  in  the  light  of  present  facts. 


I.     THE  DEVELOPMENT  OF  AMERICAN  THOUGHT 

The  difficulty  in  measuring  the  development  of  economics 
in  America  is  due  to  a  lack  of  appreciation  of  the  changes  that  have 
taken  place  in  the  last  three  decades.  From  one  point  of  view  it 
seems  as  if  American  economists  have  made  no  advance.  There  is 
no  topic  not  open  to  disagreement.  On  the  other  hand,  there  never 
have  been  thirty  years  in  the  history  of  economics  when  so  many 
fundamental  changes  have  been  wrought.  Economists  disagree, 
and  rightly,  about  matters  not  yet  settled,  but  in  these  disputes 
they  overlook  the  changes  that  are  generally  admitted.  This  makes 
it  possible  to  review  the  history  of  American  thought  and  to  separate 
the  changes  already  made  from  the  disputed  points  that  are  still 
unsettled. 

The  beginning  of  the  epoch  dates  from  the  formation  of  the 
American  Economic  Association.  Its  founders  had  little  idea  of  the 
development  through  which  economics  was  to  pass.  American 
economics  has  done  everything  but  what  was  then  expected  of  it. 
It  was  supposed  that  this  new  group  of  thinkers  would  be  historical, 
but  no  historical  work  has  been  done.  The  unexpected  was  the  rise 
of  the  school  of  deductive  theorists — the  very  thing  the  formation 
of  the  American  Economic  Association  was  designed  to  prevent. 
I  will  not,  I  hope,  be  regarded  as  egotistic  if  I  put  myself  with  Pro- 
fessors Clark  and  Giddings  as  an  influence  in  bringing  about  this 
change.  As  one  who  participated  in  the  movement,  I  wish  to  review 
its  history  with  the  idea  of  pointing  out  its  successes  and  its  failures. 

At  the  beginning  of  the  decade  it  seemed  as  if  these  writers  had 
a  common  ground,  and  that  from  their  viewpoint  a  new  school  of 
economics  would  arise.  But  fundamental  divergencies  soon  appeared 
which  gave  three  types  of  thinking  rather  than  one  school.  I  shall 
describe  these,  not  in  the  terms  of  the  discussion  at  that  time  familiar, 
but  in  a  terminology  that  has  developed  since  that  time.  Professor 
James  has  made  two  words  common  property  in  America — one 
is  "pragmatic"  and  the  other,  "pluralism."  He  pointed  out,  how- 
ever, that  these  are  not  new  kinds  of  thought,  but  new  names  for  old 
ways  of  thinking.  Writers  have  always  been  rational  or  pragmatic 
on  the  one  hand,  and  monistic  or  pluralistic  on  the  other.  But  their 
differences  were  not  clearly  denned  until  he  made  the  public  familiar 

(4) 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  5 

with  these  terms.  On  the  basis  of  these  contrasts  it  seems  plain  that 
Professor  Clark  is  an  economic  monist,  while  I  am  an  economic 
pluralist.  Professor  Clark  has  endeavored  to  clarify  the  economic 
thought,  to  state  its  principles  more  cogently  and  to  give  the  general 
lawrs  of  the  science  a  new  setting .  This,  as  I  understand  it,  is  economic 
monism.  On  the  other  hand,  I  have  started  from  some  funda- 
mental contrast  and  tried  to  deduce  from  each  term  principles  that 
seem  to  oppose  each  other.  In  my  way  of  thinking  static  and 
dynamic  are  equally  fundamental  and  neither  can  be  derived  from 
the  other.  In  economic  discussion  we  must,  therefore,  distinguish 
clearly  between  dynamic  and  static  principles,  and  expect  that  the 
laws  deduced  from  the  one  will  oppose  those  derived  from  the  other. 

A  practical  illustration  of  this  dualism  is  the  discussion  of  pro- 
tection and  free  trade,  neither  of  which,  in  my  opinion,  can  claim 
ultimate  superiority.  But  in  the  conditions  that  arise  from  age 
to  age,  the  one  or  the  other  policy  may  be  the  more  effective.  So, 
too,  in  the  contrast  between  a  pleasure  economy  and  a  pain  economy, 
neither  can  be  derived  from  the  other,  but  in  particular  epochs  of 
the  world's  history,  the  one  or  the  other  has  been  dominant.  In  the 
same  way,  the  laws  of  consumption  are  laws  of  human  nature,  and 
consequently  must  be  derived  from  the  feelings  and  appetites  of  men, 
while  the  laws  of  production  are  those  of  the  physical  world  in  which 
we  live.  Consumption,  therefore,  cannot  be  subordinated  to  produc- 
tion, nor  production  to  consumption  without  disregarding  facts  to 
which  economists  should  give  attention.  Or,  to  put  this  dualism  in 
more  general  form,  part  of  economic  science  is  based  on  physical 
nature;  from  it  come  laws  of  universal  application  which  cannot  be 
overthrown  by  the  action  of  man.  On  the  other  hand,  many  economic 
laws  are  expressions  of  human  nature.  These  are  not  only  capable 
of  modification,  but  are  continually  being  altered.  The  one  element, 
therefore,  of  economics  is  enduring,  the  other  is  temporary.  By  this 
I  do  not  mean  that  human  nature  is  easily  altered,  but  that  the 
features  we  regard  as  human  are  subject  to  evolutionary  modification. 

In  contrast  to  the  attitude  of  Professor  Clark  and  myself,  both  of 
whom  accept  economic  phenomena  as  fundamental,  Professor 
Giddings  views  are  sociological.  The  difference  between  economics 
and  sociology  is  that  the  economist  regards  as  fundamental  the 
primary  phenomena  of  his  own  science,  while  the  sociologist  regards 
economic  phenomena  as  a  consequence  of  more  fundamental  laws. 


6  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

In  summing  up  this  discussion,  I  should  say  that  the  differences 
between  Professor  Giddings  and  myself  are  still  unsettled,  while  the 
difference  between  economic  monism  and  economic  pluralism  has 
been  settled  in  favor  of  pluralism.  If  economic  monism  is  to  succeed, 
somebody  must  show  how  the  principles  of  dynamic  economics  can 
be  derived  from  the  principles  of  static  economics.  I  do  not  believe 
that  Professor  Clark  would  claim  that  he  has  done  this.  I  think, 
moreover,  that  the  failure  of  Professor  Clark  as  well  as  that  of  Pro- 
fessor Marshall  is  a  good  indication  that  it  cannot  be  done.  Pro- 
fessor Marshall,  like  Professor  Clark,  promised  a  second  book  that 
would  deal  with  these  broader  problems,  but  the  promise  has  not 
been  fulfilled.  The  Austrian  economists,  likewise,  have  hoped  to 
derive  from  the  principles  of  utility  a  general  scheme  of  economics, 
but  no  such  scheme  has  been  developed.  It  appears,  therefore,  that 
the  endeavors  to  create  an  economic  monism  in  our  age  have  failed 
as  completely  as  Ricardo  and  Mill  failed  to  create  an  economic  mon- 
ism in  their  age.  The  best  minds  of  England  and  America  have 
faced  this  problem,  and  have  been  compelled  to  give  it  up.  I,  there- 
fore, regard  it  as  settled  that  there  is  to  be  no  revival  of  economic 
monism  in  our  age.  This  does  not  mean,  however,  that  monism 
as  a  scheme  has  disappeared.  It  is  coming  forward  more  prominently 
than  ever  before,  but  it  is  now  sociology,  not  economics. 

A  second  change  of  this  epoch  (1890-1900)  is  the  rise  of  an  eco- 
nomic interpretation  of  history.  As  the  economic  interpretation  of 
history  is  associated  with  socialism  rather  than  with  economics, 
it  is  necessary  to  speak  more  fully  of  the  real  origin  of  this  type  of 
thinking.  The  first'  person  to  use  the  phrase  "economic  interpreta- 
tion of  history"  was  Professor  Rogers,  He  used  this  as  a  means  of 
getting  at  the  laws  which  could  not  be  determined  from  universal 
principles.  The  wages  problem,  instead  of  being  discussed  deduc- 
tively from  the  principles  of  nature,  is  to  be  studied  through  the  con- 
crete facts  of  certain  epochs  in  which  the  wage  problem  is  prominent. 
He,  therefore,  regarded  the  study  of  four  centuries  of  English  history 
as  giving  the  clue  to  a  real  discussion  of  the  wages.  As  a  follower  of 
Professor  Rogers  in  this  field,  I  extended  the  thought  so  as  to  make 
the  economic  interpretation  of  history  the  means  of  getting  at  the 
dynamic  laws  of  social  change.  The  difference  between  dynamic  laws 
and  static  laws  is  that  static  laws  can  be  determined  under  any  group 
of  social  conditions.  They  are  always  present  and  can  always  be 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  7 

found.  But  dynamic  laws  cannot  be  determined  in  this  way.  The 
dynamic  elements  become  prominent  one  after  another,  and  the 
changes  they  bring  must  be  studied  in  the  epoch  in  which  they  are 
dominant.  If  one  wishes  to  study  changes  in  consumption,  he  must 
study  the  epochs  where  alterations  in  consumption  are  prominent. 
Dynamic  changes  are  also  brought  about  by  invention.  He  must, 
therefore,  look  to  the  particular  ages  where  invention  has  been 
prominent  to  discover  what  its  effects  are.  The  economic  interpreta- 
tion of  history,  then,  is  the  study  of  the  prominent  changes  which 
take  place  in  each  epoch,  and  from  a  series  of  such  studies  one  can 
create  a  general  interpretation  of  genetic  growth.  This  way  of 
thinking  marks  a  change  in  the  method  of  economic  study  quite  as 
important  as  the  pluralism  that  has  come  from  the  contrast  between 
static  and  dynamic  economics.  It  is  a  matter  of  slight  importance 
to  know  the  originator  of  this  method  of  study.  It  is  of  prime 
importance,  however,  to  know  the  changes  in  American  thought  that 
have  been  wrought  by  it. 

The  epoch  since  1900  has  been  important  for  another  reason. 
The  characteristic  change  has  been  the  increasing  influence  of  social- 
ism. In  1900  it  could  be  said  that  socialism  occupied  so  minor  a  place 
that  it  could  be  overlooked.  The  literature  of  the  epoch  will,  I  am 
sure,  bear  out  this  statement.  In  1912,  however,  it  would  be  nearer 
right  to  say  that  all  thinkers  are  socialistic.  Either  as  a  matter  of 
principle,  or  by  some  type  of  dualism,  they  admit  it  as  an  element 
in  their  thought  or  as  a  mode  of  expressing  their  feelings.  The  impor- 
tant book  in  bringing  about  this  change  is  Professor  Seligman's 
"Economic  Interpretation  of  History."  Without  exaggeration  it  can 
be  said  that  this  book  is  the  Bible  of  American  socialism.  Instead 
of  going  to  the  writings  of  Marx,  socialists  refer  to  it  as  an  authority 
on  fundamental  topics.  This  of  itself  would  be  a  matter  of  impor- 
tance but  its  real  influence  lies  in  the  fact  that  it  enabled  a  large 
group  of  American  thinkers  to  accept  socialism  and  to  express  their 
ideas  in  its  terms.  Karl  Marx  found  the  English  field  occupied 
by  what  were  termed  sentimental  socialists.  His  great  work  was  the 
transformation  of  socialism  from  a  sentimental  to  a  scientific  basis. 
This  change  had  a  marked  influence  on  the  Continent  of  Europe, 
but  the  sentimental  socialists  remained  in  England  and  America 
practically  as  they  were.  The  keynote  to  their  sentimental  attitude 
is  a  repugnance  towards  anything  materialistic.  Consequently 


8  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

so  long  as  socialism  was  put  in  materialistic  terms,  they  would  not 
accept  it.  When,  however,  Professor  Seligman  stripped  Marxian 
doctrines  of  their  materialistic  interpretation,  and  gave  them  a  senti- 
mental setting,  this  group  were  readily  converted  into  modern 
socialists. 

American  socialists  are  not  scientific  socialists  of  the  type  Marx 
sought  to  create.  Every  leading  socialistic  writer  is  clearly  idealistic 
in  his  attitude,  and  would  repudiate  socialism  if  it  were  put  in  a 
materialistic  shape.  Sentimental  socialism  to-day  is  a  new  form 
of  expressing  idealistic  concepts.  That  writers  with  literary  tradi- 
tions should  accept  an  economic  interpretation  of  history  is  a  vic- 
tory. From  now  on,  they  are  not  enemies  but  friends.  Whatever 
may  be  the  ultimate  decision  as  to  particular  doctrines,  economic 
evidence  will  for  both  groups  be  fundamental. 


II.    THE  PROBLEM 

It  is  plain  that  American  thought  has  made  considerable  advance 
and  has  attained  some  degree  of  originality.  From  this  it  does 
not  follow  that  all  theoretical  problems  have  been  settled.  On 
the  contrary,  it  is  evident  that  fundamental  concepts  are  still  open 
to  discussion,  and  that  the  movement  in  American  thought  has  not 
yet  terminated.  Two  victories,  however,  seem  to  have  been  won. 
In  the  first  place,  American  thought  has  been  made  independent 
of  European  thought.  We  are  no  longer  under  the  tutelage  either 
of  England  or  Germany.  The  second  victory  is  that  economic 
pluralism  has  won  as  against  economic  monism.  By  this  I  do 
not  mean  that  pluralism  has  gained  a  victory  over  monism.  That 
would  be  claiming  too  much.  But  economic  monists  must  become 
sociologists,  and  as  such  they  will  be  unable  to  carry  on  the  struggle 
within  the  economic  field  that  they  have  in  the  past  been  able  to 
do.  As  a  consequence  of  this  change  has  come  an  advance  in  the 
economic  interpretation  of  history.  The  discussion  of  the  past 
in  the  light  of  the  present  is  on  a  par  with  a  discussion  of  the  pre- 
sent in  the  light  of  the  past.  Without  meaning  to  prejudice  the 
conclusions  from  these  contrasted  viewpoints,  it  seems  clear  that 
a  sociological  interpretation  has  displaced  the  old  historical  inter- 
pretation. As  a  whole,  this  sociological  interpretation  is  based 
on  a  material  interpretation.  If  any  one  asserts  that  the  sciences 
have  an  order  of  development,  and  that  the  physical  sciences  are 
fundamental,  no  escape  is  possible  from  the  conclusion  that  the  prem- 
ises of  these  sciences  are  also  the  premises  of  social  science.  This 
means  a  material  interpretation  of  social  development.  There  is 
another  way  of  putting  this  contrast  that  bases  it  on  the  difference 
between  pluralism  and  monism.  If  the  sociological  view-point  is 
correct,  the  primitive  history  of  man  is  fundamental  to  an  interpre- 
tation of  the  present  social  life,  and  discussions  of  social  affairs  must 
begin  with  a  study  of  the  origins  of  man.  If,  however,  there  are  two 
economies,  a  pain  economy,  based  on  struggle,  and  a  pleasure  economy, 
in  which  harmony  prevails,  neither  the  history  of  man  in  this  pain 
economy  nor  the  struggles  then  important  are  fundamental  to 
present  discussions.  The  approach  to  the  social  life  of  man  must 
be  through  his  present  economic  activities. 

(9) 


10 

This  gives  us  one  way  of  stating  the  problem  now  confronting 
American  thought.  The  standpoint  of  cosmology  gives  another  way 
of  stating  it.  In  the  past,  two  cosmologies  have  stood  opposed  to 
one  another.  One  has  been  a  theological  cosmology  at  the  basis 
of  religious  thought,  and  the  other,  the  material  cosmology,  popular 
with  students  of  physical  science.  Both  of  these  cosmologies  are 
monistic,  one  having  at  its  basis  the  thought  of  a  spiritual  origin  of 
the  universe  while  the  other  emphasizes  a  material  origin.  The 
economists  have  not  taken  sides  in  the  contest  between  the  theologi- 
cal and  material  cosmologies.  Every  economist  has  admitted  phys- 
ical premises.  No  economist  has  denied  what  in  terms  of  religion 
are  called  theological  premises.  It  should  be  remembered  that  the 
early  economists  were  theologians,  and  that  the  basis  on  their  thought 
was  known  as  natural  theology.  Since  then  there  has  been  a  shift- 
ing in  the  position  of  economists,  sometimes  towards  a  more  material, 
and  sometimes  towards  a  more  spiritual  standpoint,  but  economic 
cosmology  has  usually  been  pluralistic,  and  thus  has  accepted  prem- 
ises that  must  be  regarded  as  antagonistic.  There  are  many  ways 
of  expressing  the  essentials  of  an  economic  cosmology,  no  one  of  which 
is  fundamental,  nor  generally  accepted.  I  shall,  therefore,  put  in 
two  columns  some  familiar  contrasts  with  the  idea  of  bringing  out 
the  fundamental  opposition  that  exists  between  them.  In  the  first 
column  will  be  found  those  terms  that  imply  a  spiritual  or  genetic 
attitude,  while  in  the  other  are  placed  those  which  are  material  or 
structural  in  their  implications. 

I  II 

Genetic  Structural 

Sentiment  Logic 

Dynamic  Static 

Passion  Intellect 

Invention  Habit 

Observation  Deduction 

Intuitive  Statistical 

Religion  Science 

If  the  logical  or  monistic  expression  of  thought  is  correct,  all 
of  the  ideas  in  column  I  are  derived  from  those  in  column  II.  If, 
on  the  contrary,  they  cannot  be  derived  from  the  ideas  in  column  II, 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  11 

the  two  groups  must  be  put  in  a  fundamental  contrast  with  one 
another  and  as  a  result  an  economic  pluralism  is  created.  This 
gives  our  problem  stated  in  its  second  form. 

If  economic  pluralism  be  correct,  sentiment  must  be  treated  as 
a  fundamental  fact,  and  not  as  a  social  derivative.  Both  democracy 
and  socialism  are  emotions  arising  from  economic  relations  which 
must  be  accepted  as  fundamental  in  any  economic  interpretation. 
Democracy  is  an  emotional  reaction  against  the  privileges  of  the 
strong,  and  socialism  is  an  emotional  reaction  against  the  exploita- 
tion of  the  weak.  If  one  has  no  emotional  reaction  against  privilege, 
he  lacks  an  element  that  modern  civilization  should  have  given  him. 
If,  likewise,  the  exploitation  of  the  weak  has  no  concern  for  him,  he 
must  be  looked  upon  not  as  a  superman,  but  as  subnormal.  A  man 
may  be  democratic,  that  is,  have  strong  emotional  reactions  against 
privilege,  and  at  the  same  time  have  no  emotional  reactions  against 
exploitation.  The  opposite  defect  of  having  an  emotional  reaction 
against  exploitation  without  a  corresponding  reaction  against  privilege 
is  not  so  common,  yet  it  is  real.  Both  attitudes  should  be  regarded 
as  evidence  of  incomplete  social  development. 

If  a  change  is  made  from  sentiment  to  policy,  a  corresponding 
contrast  presents  itself.  When  men  emotionally  react  against  priv- 
ilege, the  economic  basis  of  this  reaction  is  the  unequal  distribution 
of  profits.  The  social  democrat,  therefore,  seeks  to  equalize  profits,  and 
opposes  any  centralization  giving  one  man  a  greater  share  than  an- 
other. The  socialistic  program  demands  not  merely  an  equalization  of 
profits  but  also  an  equalization  of  income.  This  program  makes  more 
fundamental  changes  than  would  be  demanded  by  a  democratic 
program.  To  put  the  contrast  in  another  way,  the  equalization  of 
profits  does  not  demand  any  change  in  the  capitalistic  system  nor 
in  the  prevailing  system  of  private  property.  Both  these  institu- 
tions could  be  kept  in  their  present  form  if  the  emotions  of  society 
are  aroused  against  the  centralization  of  profits  rather  than  against 
the  inequality  of  income.  The  essence  of  capitalistic  industry  is 
profit.  Every  industrial  change  that  raises  profits  strengthens 
capitalism.  It  grows  in  power  as  the  rate  of  profit  rises,  and  would 
fall  if  the  rate  of  profit  were  taken  away. 

Such  are  the  facts  which  create  the  present  problems  of  Ameri- 
can thought.  Do  invention  and  economy  create  wealth  or  is  it  the 
result  of  toil  and  sacrifice?  This  is  the  problem  of  production. 


12  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

Are  wages  and  interest  determined  by  concurrent  events  or  by  pre- 
established  laws?  This  is  the  problem  of  distribution.  Does  social 
law  arise  from  cooperative  assent  or  is  it  the  coercive  result  of  state 
action  ?  This  is  the  problem  of  social  control.  Is  the  basis  of  thought 
pragmatic  and  hence  economic,  or  is  it  dogmatic  and  thus  sociologi- 
cal ?  This  is  the  problem  of  method.  Are  cooperation  and  compro- 
mise stronger  motives  than  discord  and  struggle  ?  This  is  the  problem 
of  progress.  All  these  are  in  reality  one  problem  the  solution  of 
which  demands  a  unified  treatment.  In  the  past  economists  have 
striven  to  build  a  purely  rational  system  that  would  be  a  monistic 
expression  of  progress.  Their  failures  have  created  the  present 
situation  and  awakened  a  demand  for  the  reconstruction  of  economic 
theory.  Economic  thought  should  be  based  on  industrial  changes 
already  made  and  on  social  reorganizations  plainly  manifest.  It 
will  thus  become  pragmatic  and  incorporate  in  itself  all  the  elements 
making  for  the  improvement  of  mankind. 


III.     THE  ORIGIN  OF  SOCIALISM 

The  American  public  has  recently  been  aroused  by  the  develop- 
ment of  a  group  of  socialists  with  a  philosophy  that  would  revolu- 
tionize American  life.  The  cause  of  this  does  not  lie  in  the  arguments 
presented  so  much  as  in  the  thought  that  socialism  has  a  unity 
which  puts  it  in  direct  contrast  to  conventional  views.  It  seems  as 
though  we  were  facing  a  revolution,  and  that  public  opinion  must  be 
radically  modified  so  as  to  eliminate  capitalism.  Those  who  present 
this  view  emphasize  three  things :  the  unity  of  socialism,  the  logic 
of  socialism,  and  the  hero  of  socialism.  If  socialism  is  a  unit;  if  it 
has  a  hero  and  a  logic,  a  revolution  seems  inevitable.  This  view- 
point was  first  brought  to  the  attention  of  the  American  public  by 
Professor  Seligman's  "Economic  Interpretation  of  History."  Later 
writers  have  been  even  more  eulogistic;  in  its  present  form  the 
Marxian  tradition  can  be  found  in  an  article  by  Professor  Small 
on  "Socialism  in  the  Light  of  Social  Science."1  The  difference  in 
the  two  viewpoints  consists  in  the  fact  that  Professor  Seligman 
emphasizes  the  importance  of  the  economic  interpretation  of  history. 
Professor  Small  not  only  accepts  the  position  taken  by  Professor 
Seligman,  but  lauding  Marx  as  the  Galileo  of  social  science, 
enunciates  the  economic  doctrines  of  which  Marx  was  the  orig- 
inator. 

To  appreciate  this  issue  the  double  origin  of  American  economics 
must  be  made  evident.  One  basis  lies  in  the  Ricardian  economics  best 
expressed  by  Mill  in  his  political  economy;  the  other,  in  the  German 
historical  school  in  which  the  present  generation  of  American  econ- 
omists has  been  educated.  If  Mill  is  wrong  in  his  history  and  the 
German  historical  economists  in  their  statements  of  facts,  there  are 
errors  in  the  reasoning  of  American  economists  hidden  under  the 
prestige  of  these  two  groups  of  thinkers.  In  the  first  place,  did  Mill 
misrepresent  English  economic  thought  ?  Secondly,  did  the  national 
prejudices  of  the  German  economists  prevent  them  from  recognizing 
doctrines  as  English  that  were  really  so,  and  in  this  way  misled 
the  American  economists  who  have  been  educated  under  their 
influence  ? 

Why  did  Mill  neglect  the  real  creators  of  English  economics? 

^American  Journal  of  Sociology,  May,  1912. 

(13) 


14  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

In  the  first  place,  English  writers  expressed  their  ideas  in  theological 
terms,  while  Mill  was  opposed  to  natural  theology.  In  the  second 
place,  the  traditions  of  the  group  to  which  Mill  belonged  were  opposed 
to  sentiment  as  a  force  in  social  life.  They  tried  to  bring  everything 
to  a  logical  basis,  and  in  so  doing  overlooked  the  power  of  the  emotions 
to  shape  the  lives  of  men  and  the  history  of  nations.  The  work  of 
any  thinker  who  emphasized  sentiment  was  disregarded.  This  shut 
out  those  economists  who  felt  a  natural  resentment  against  the 
industrial  system  then  in  vogue. 

These  are  some  of  the  reasons  why  Mill  did  not  give  credit  to  his 
opponents.  Why  did  he  emphasize  Ricardo?  Because  Ricardo 
gave  special  attention  to  the  importance  of  profits  in  English  industry. 
He  also  emphasized  the  evils  of  over-population,  and  sought  to  estab- 
lish a  definite  relation  between  wages  and  the  cost  of  living.  These 
doctrines  favored  by  Mill  were  opposed  by  many  economists  in  his 
time.  He  was  forced,  therefore,  to  make  Ricardo  represent  not  only 
his  own  doctrines  but  many  others  advocated  by  opposing  economists 
that  could  not  be  credited  to  them  without  weakening  Mill's  position. 
Mill,  more  than  any  one  else,  was  the  originator  of  what  is  called  eco- 
nomic orthodoxy.  He  would  not  recognize  English  writers  who  took 
opposing  views.  When  he  wished  to  make  use  of  the  doctrines 
they  held  he  went  to  the  French  writers  for  them.  A  sample  of 
this  is  his  treatment  of  socialism.  He  had  been  reading  foreign  books 
on  socialistic  literature,  and  these  he  utilized  in  his  statement  of 
socialistic  doctrine. 

The  German  historical  economists  are  an  important  element  in 
the  new  situation  because  their  views  have  had  so  great  an  influence  in 
shaping  American  economic  thought.  English  political  and  eco- 
nomic theory  had  been  introduced  into  Germany  during  the  first  part 
of  the  nineteenth  century,  but  it  was  opposed  by  the  rising  national 
sentiment  which  sought  to  free  Germany  from  foreign  domination. 
This  sentiment  is  the  basis  on  which  recent  German  progress  has 
taken  place  and  with  it  no  one  can  find  fault.  But  the  general  antag- 
onism which  it  generated  towards  England  resulted  in  the  displace- 
ment of  English  ideas  both  political  and  economic.  The  German 
historical  school  went  to  the  side  of  Bismarck  and  opposed  the  social 
movements  having  an  English  origin.  This  opposition  to  English 
ideas,  reflected  both  in  history  and  economics,  is  one  of  the  striking 
facts  with  which  Americans  studying  in  Germany  came  in  contact. 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  15 

The  result  has  been  that  modern  economic  theory  has  finally  worked 
its  way  into  Germany  as  socialism.  Marx  Germanized  English 
economics.  This  is  his  virtue  and  service.  Every  proposition  that 
he  advances,  both  true  and  false,  had  been  fully  stated  in  England. 
But  for  the  prejudices  of  the  German  economists,  these  ideas  would 
have  become  commonplaces  in  Germany,2  and  thus  would  have  pre- 
vented Marx  from  gaining  position  by  utilizing  them.  Of  this  the 
doctrine  of  surplus  value  is  an  example. 

In  seeking  the  origin  of  economic  ideas,  it  is  erroneous  to  follow 
the  history  of  words  rather  than  of  ideas.  Telling  expressions  are 
invented  not  at  the  start  but  only  after  a  long  period  of  obscure 
development.  If  the  question  is  asked,  who  first  used  the  term 
"surplus  value,"  the  answer  is  that  while  the  term  had  been  used  by 
economists  before  Marx's  time,  it  is  also  true  that  they  made  little 
use  of  it.  The  real  question  is,  did  Marx  when  he  translated  into 
German  the  term  "surplus  value"  have  in  mind  the  older  idea  of 
profits?  If  under  the  head  of  profits  the  origin  of  surplus  value  is 
sought,  we  find  it  to  be  one  of  the  oldest  concepts  of  English  thought. 
Who  originated  the  idea  that  there  was  a  surplus  value  in  industry, 
or,  in  other  words,  who  found  that  after  accounting  for  all  of  the 
expenses  of  production,  there  was  still  a  profit  left  over?  The  reply 
to  this  must  be  that  when  commercial  bookkeeping  came  into  gen- 
eral use,  the  fact  became  known  that  after  accounting  for  every 
expense,  a  large  surplus  remained.  To  illustrate  this,  I  will  give 
three  examples  of  bank  statements  taken  from  a  current  financial 
journal : 

I 

Liabilities 

Capital $47,000,000 

Surplus 26,000,000 

Dividends  for  the  last  ten  years.  . .  11,  11,  12,  12,  12,  12,  12,  \2\,  12^,  12£  percent 

2  "There  is  no  socialistic  doctrine  of  essential  significance,  no  socialistic  theory  of  general 
industry,  of  historical  development,  of  the  state,  of  law,  which  had  not  already  been  spoken  out  at 
the  middle  of  the  nineteenth  century,  and  had  not  been  applied  in  criticism  of  the  existing  societary 
and  industrial  order;  yet  German  national  economic  science  did  not  regard  it  as  necessary  to  reach 
an  understanding  with  these  doctrines.  .  .  .  German  national  economy  passed  by  the  signs 
of  the  times  without  attention.  The  noise  of  the  street,  the  strokes  of  the  scourge  of  the  agitating 
publicists,  the  historical  and  philosophical  observations  of  the  critics  of  society  affected  it  as  little 
as  they  would  the  astronomers  who  trace  out  in  the  orbits  of  the  stars  the  eternal  laws  of  nature." 
Quoted  from  "The  Infusion  of  Socio-Political  Ideas  into  the  Literature  of  German  Economics," 
by  Eugen  von  Philippovich,  in  the  American  Journal  of  Sociology,  September,  1912,  pp.  147,  149. 


16  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

II 

Liabilities 

Capital  stock  paid  in $10,000,000 

Surplus  fund 15,000,000 

Undivided  profits 6,500,000 

III 

Liabilities 

Capital  stock  paid  in $3,000,000 

Surplus  fund 12,500,000 

Undivided  profits 800,000 

In  the  first  instance,  the  capital  is  $47,000,000  and  the  accumu- 
lated surplus  is  $26,000,000.  This  surplus  is  not  interest  because 
the  same  advertisement  tells  us  that  the  rate  of  interest  for  the  last 
ten  years  has  been  from  11  to  \2\  per  cent.  It  is,  therefore,  a  natural 
question  to  ask,  to  whom  does  the  $26,000,000  of  surplus  belong? 
The  second  statement  shows  a  surplus  much  greater  than  the  paid- 
up  capital.  Can  we  wonder  that  people  should  ask  the  question, 
why  is  this  $15,000,000  withheld  when  thousands  of  people  are  work- 
ing for  five  dollars  a  week?  In  the  third  statement  the  accumulated 
surplus  is  more  than  four  times  the  paid-up  capital.  These  are  not 
exceptional  statements  nor  are  they  new.  English  banks  have 
given  such  statements  for  two  hundred  years.  English  financial 
development  also  gives  the  basis  for  the  doctrine  that  industrial 
capital  is  accumulated  or  undistributed  profits.  The  orthodox 
economists  claim  that  capital  is  the  result  of  saving.  This  doctrine 
however,  has  never  been  popular  with  English  and  American  pro- 
moters. Every  financial  heresy  has  been  based  on  the  thought  that 
industry  can  be  started  by  other  means  than  saving.  Issue,  say, 
$100,000  of  paper  money  and  use  it  to  start  an  industrial  establish- 
ment. Enlarge  the  plant  from  the  accumulated  profits  and  live  off 
the  proceeds.  Capital  can  thus  be  created  without  work;  profits 
can  accumulate  so  as  to  make  not  only  individuals  but  the  whole 
nation  wealthy.  All  this  may  be  false,  but  it  is  not  new.  In  its 
origin,  it  preceded  socialism  by  a  hundred  years.  Instead  of  being 
the  claim  of  obscure  thinkers,  there  is  scarcely  a  town  in  this  country 
that  has  not  tried  to  increase  its  wealth  by  this  means.  It  is  the  most 
popular  fallacy  that  economists  have  had  to  oppose. 

How  do  these  theories  become  socialism?  The  reply  is  that 
English  sentiment  has  always  been  opposed  to  the  exploitation  of  the 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  17 

poor.  After  the  facts  of  industrial  development  became  known, 
it  was  not  possible  to  keep  people  from  asking,  what  right  have 
employers  to  profits?  For  this  reason  a  popular  agitation  began 
having  as  its  basis  the  thought  that  this  fund  should  go  to  the  labor- 
ing population  in  whole  or  in  part.  In  this  way  English  opinion 
became  steadily  socialistic  in  sentiment.  There  were  more  complaints 
about  the  evils  that  industrial  life  brought,  and  less  about  the  evils 
connected  with  nature.  The  theological  viewpoint  was  replaced  by 
the  economic,  and  reformers  were  compelled  to  find  some  new  origin 
for  the  evils  about  them.  Is  it  any  wonder  that  they  viewed  the 
industrial  system  as  the  source  and  cause  of  social  injustice?  Their 
sentiments,  however,  led  them  to  favor  two  doctrines  out  of  harmony 
with  each  other.  One  was  that  labor  is  the  source  of  wealth ;  the  other, 
that  surplus  profits  should  go  to  the  laborers  in  whole  or  in  part. 
If  the  socialists  accepted  economic  optimism  and  admitted  that  labor 
was  not  the  source  of  wealth,  they  would  have  no  basis  for  their 
sentiment.  If  labor  does  not  produce  wealth,  then  why  feel  a  strong 
interest  in  the  oppressed  laborer?  On  the  other  hand,  if  there  is  no 
surplus,  as  the  pessimists  claim,  there  is  no  basis  for  sentiment. 
The  doctrine  that  capital  is  produced  by  labor  and  that  capital 
is  undivided  profits  cannot  be  brought  into  logical  harmony.  The 
result  is  an  inherent  contradiction  that  the  early  English  socialists 
could  not  overcome,  and  hence  they  failed  to  impress  themselves 
on  national  thought. 

The  successful  thinkers  and  actors  of  the  following  epoch  were 
men  who  appealed  to  class  consciousness  and  to  local  sentiment, 
and  thus  by  gaining  for  themselves  a  definite  constituency,  have 
been  lauded  as  thinkers  far  above  their  real  merit.  Cobden's 
influence  is  not  due  to  his  appeal  to  universal  principles  but  to 
the  fact  that  his  ideas  favored  the  commercial  classes  of  England. 
He  thus  paved  the  way  for  economic  orthodoxy.  Carlyle's  appeal 
is  not  to  commercial  England  but  to  aristocratic  England.  Bismarck 
appealed-  to  race  hatred  as  plainly  as  Marx  appealed  to  class  hatred. 
Carey  was  also  a  good  fighter,  who  denounced  English  industrial 
development  as  vividly  as  did  Marx.  The  difference  between  the 
two  lies  in  the  fact  that  Carey  was  optimistic,  where  Marx  was 
pessimistic.  The  economic  harmonies  of  Carey  have  as  clear  an  eco- 
nomic basis  as  the  pessimistic  dogmas  of  Marx.  If  one  is  an  economic 
interpretation  of  history,  the  other  is  also. 


18  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

All  these  views  are  a  part  of  one  general  change.  Modern  indus- 
try had  disturbed  the  relations  existing  between  European  races  and 
industrial  classes.  A  struggle  for  a  new  adjustment  was  inevitable 
and  has  been  going  on  for  sixty  years  with  unabated  vigor,  for  in 
such  an  epoch  the  mild  optimists  of  the  earlier  epoch  were  out  of  place. 
We  are  so  used  to  the  new  methods  that  we  smile  when  peace,  harmony 
and  cooperation  are  spoken  of.  The  childlike  faith  of  the  following 
passage  seems  unreal.  Yet  it  was  once  the  belief  of  a  group  with 
broad  interests  and  high  hopes.  It  shows  the  gulf  between  them  and 
Marx  better  than  a  volume  of  words. 

"But  let  no  one  imagine  that  so  desirable  a  condition  can 
be  attained,  except  by  a  complete  revolution  in  the  principles 
and  practices  of  society;  to  be  effected,  however,  in  peace  and 
order,  and  with  the  entire  concurrence  of  all  parties  concerned; 
for  violence  is  utterly  opposed  to  the  spirit  of  the  new  system, 
by  which,  in  future,  it  is  proposed  to  carry  on  the  affairs  of  life. 
"The  Social  Reformer, — strong  in  his  conviction  of  the 
everlasting,  saving  truth,  that  the  character  of  man,  in  all 
countries  and  climes,  and  under  all  conditions,  is,  at  every  period 
of  his  life,  the  result  of  his  original  organization,  and  of  the 
influence  of  external  circumstances  (mostly  from  under  his  con- 
trol), acting  upon  that  organization, — has  the  most  unbounded 
charity  for  the  convictions,  feelings,  and  (necessary)  conduct  of 
all  men;  and  his  constant  and  unceasing  endeavor  therefore  is, 
peacefully  to  withdraw  all  those  circumstances  which  are  known 
to  produce  evil,  and  to  replace  them  by  those  only  which  are 
known  to  produce  good  to  the  human  race.  He  discards  all 
force  and  delusion,  for  these  will  not  serve  his  holy  cause. 
Clothed  in  the  panoply  of  truth,  he  goes  forth  to  do  battle  with 
error,  relying  on  the  powers  of  moral  suasion  and  kindness 
alone,  as  the  only  agents  capable  of  effecting  a  revolution  so 
glorious  and  so  God-like."3 

» Distribution  of  Wealth,  William  Thompson,  pp.  xii-xiii. 


IV.     THE  ECONOMIC  MARX 

The  preceding  chapter  pictures  the  state  of  economic  thought 
when  Marx  arrived  in  England.  We  thus  get  the  background  from 
which  Marx  developed  and  a  method  by  which  his  contributions 
can  be  separated  from  the  tendencies  of  the  age  and  from  the  achieve- 
ments of  his  contemporaries.  Marx  is  a  German  reared  in  the  atmos- 
phere of  political  revolution,  and  then  immersed  in  an  English 
environment  where  the  struggle  of  classes  had  displaced  the  older 
race  struggles  still  dominant  on  the  Continent.  It  is  interesting 
to  see  how  quickly  Marx  seized  on  the  salient  points  of  the  new 
situation  and  converted  a  philosophy  designed  to  settle  English 
industrial  problems  into  a  mechanism  to  promote  a  revolution  in 
Germany.  In  this  change  two  initial  steps  were  needed.  The 
basis  of  English  thought  in  national  theology  must  be  replaced  by 
the  material  view  then  prevalent  in  Germany.  Sentiment  and 
theology  were  to  be  excluded  and  a  social  philosophy  developed 
that  would  stand  the  test  of  modern  criticism.  This  is  what  Marx 
means  by  scientific  socialism.  The  second  change  was  in  the 
opposite  direction.  The  early  socialists  had  made  their  appeal 
solely  to  reason.  They  expected  to  convince  employers  that  better 
conditions  and  higher  wages  were  industrially  advantageous  and 
thus  make  a  transition  to  socialism  with  the  assent  of  all  industrial 
groups.  This  harmony  of  interests  Marx  replaced  by  the  theory  of 
class  struggle.  Revolution  was  to  do  what  th'e  slow  working  of 
economic  law  had  failed  to  accomplish. 

In  the  first  of  these  doctrines  there  is  little  unique  in  Marx's 
position.  Materialistic  thought  had  already  made  great  headway 
and  was  promoted  by  several  strong  thinkers.  The  second  also 
was  in  harmony  with  the  trend  of  events.  The  industrial  revolution 
had  made  so  many  alterations  in  the  position  of  races  and  classes 
that  a  new  equilibrium  could  be  reached  if  at  all  only  after  a  painful 
struggle.  It  was  useless  to  ask  a  race  in  a  new  position  of  economic 
advantage  to  forego  its  benefits  and  equally  futile  to  expect  an  old 
established  class  to  accept  tamely  the  loss  of  political  power  and  of 
social  position.  A  new  control  in  the  political  and  economic  world 
had  to  be  established  by  a  struggle  that  was  to  last  for  fifty  years. 

(19) 


20  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

Marx  saw  the  nature  of  the  coming  conflict  more  plainly  than  his 
contemporaries  and  by  his  emphasis  of  class  struggle  did  much  to 
change  the  center  of  thought  from  the  political  struggles  of  the  past 
to  the  economic  struggles  of  the  present.  What  nation  should  sur- 
vive was  an  old  problem.  What  class  had  the  power  of  survival 
was  a  new  way  of  stating  the  opposition  of  interests  which  all  felt 
but  no  one  before  Marx  had  fully  expressed. 

It  is  difficult  to  follow  Marx's  development  because  his  early 
statements  are  meager  and  the  later  ones  are  more  tradition  than 
fact.  His  earlier  thought,  as  I  interpret  it,  was  sociological  in  char- 
acter while  his  later  thought  was  economic  and  revolutionary.  This 
means  that  he  first  put  an  emphasis  on  a  material  interpretation 
of  history  and  hoped  to  show  that  the  laborers  were  the  surviving 
class  into  whose  hands  society  was  to  come.  Such  a  transition  of 
thought  would  be  easy  to  make  and  that  he  did  make  it  is  borne  out 
by  many  contemporary  facts.  This  position,  however,  became 
untenable  through  the  rise  of  the  theory  of  evolution.  Darwinism 
does  not  prove  that  the  world  belongs  to  rabbits.  It  proves  that 
rabbits  belong  to  foxes.  Such  an  evolution  could  not  take  industry 
out  of  the  hands  of  the  capitalists;  it  would  put  the  laborers  more 
completely  at  their  mercy.  Had  Marx  not  seen  this  he  would  have 
spent  his  time  on  some  book  emphasizing  the  material  concept  of 
history  and  thus  would  have  ended  not  as  an  economist  but  as  a 
rival  to  Buckle. 

Events,  however,  went  too  rapidly  for  so  slow  a  movement  of 
thought.  Revolution  was  in  the  air.  It  never  seemed  so  strong 
nor  so  widespread  as  in  1848.  Every  one  feared  another  French 
Revolution  and  believed  a  clash  was  at  hand  that  would  settle 
whether  conservative  or  radical  was  to  control  the  destinies  of  Eng- 
land. If  the  political  control  of  a  long-established  aristocracy  could 
be  wrested  from  them,  why  could  not  the  economic  control  of 
the  capitalists  be  likewise  overthrown?  To  create  the  basis  for 
this  change  demanded  a  new  economics.  Sentiment  might  be  a 
force  in  an  upheaval  but  it  could  not  bring  on  an  industrial  reorgan- 
ization helpful  to  the  workers. 

That  Marx  had  such  a  thought  is  shown  by  his  long  continued 
attempt  to  reconstruct  economic  theory  in  harmony  with  revolu- 
tionary concepts.  His ' '  Capital "  is  a  monumental  endeavor  to  reduce 
to  harmony  a  group  of  conflicting  doctrines  that  did  not  thrive  in 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  21 

English  atmosphere.  The  theory  of  progress  through  capitalistic 
control  had  gained  an  ascendancy  and  a  unity  hard  to  break.  Revo- 
lutionary economics  must  seek  its  basis  in  some  other  quarter.  To 
this  new  position  three  doctrines  are  necessary:  that  there  is  an 
undistributed  surplus;  that  this  belongs  to  the  laborers,  and  that 
in  some  way  capitalism  will  break  down,  thus  enabling  the  laborers 
to  come  to  their  own.  The  antinomy  of  socialism  lies  in  the  opposi- 
tion of  the  first  two  propositions.  If  there  is  a  large  undistributed 
surplus,  its  origin  has  some  other  source  than  labor.  If  wealth  is 
not  the  result  of  toil,  the  workers  have  no  superior  claim  to  it.  Sym- 
pathy for  the  laborers  can  arise  only  when  toil  is  the  source  of  the 
produce  annually  distributed  by  the  economic  process.  Deny  the 
existence  of  a  surplus  and  there  is  nothing  to  contend  for.  Make 
it  emphatic  and  the  weakness  of  the  workers  in  an  economic  struggle 
becomes  apparent. 

Such  is  the  problem  of  Marx  as  I  see  it.  His  admirers  would 
put  it  in  another  way.  They  fail  to  distinguish  between  what  Marx 
did  and  what  had  been  done  for  him  by  the  earlier  progress  of  eco- 
nomic thought.  Professor  Seligman  bases  his  claim  of  Marx's  origi- 
nality solely  on  his  presentation  of  an  economic  interpretation  of 
history.  Professor  Small  is  more  enthusiastic.  He  calls  Marx  the 
Galileo  of  social  science.  This  estimate  is  interesting  because  ten 
years  ago  Dr.  Small  would  doubtless  have  named  Auguste  Comte 
as  the  hero  of  social  science.  Sociology  has  undergone  a  trans- 
formation during  the  last  decade  by  which  it  has  ceased  to  be  a  his- 
tory of  civilization  of  the  type  Comte  originated  and  has  now  become 
a  theory  of  race  and  class  struggle.  "No  one,"  Dr.  Small  tells  us, 
"gets  through  a  primer  of  social  science  to-day  without  learning 
that  class  conflict  is  to  the  social  process  what  friction  is  to  mechan- 
ics." This  brings  sociology  and  socialism  into  harmony  and  creates 
a  common  basis  and  a  common  faith.  It  is  one  thing,  however,  to 
assert  the  importance  of  Marx  to  sociology,  and  another  to  attribute 
to  him  a  like  originality  in  economics.  If  Dr.  Small  connected  the 
history  of  the  theory  of  profits  with  that  of  surplus  value,  he  would 
not  have  called  the  earlier  economic  statements  of  surplus  value 
"rudimentary."  If  he  had  taken  Mill's  Political  Economy  into 
account,  he  would  not  have  found  Marx  original  in  asserting  that 
laborers  and  capitalists  are  "sharply  distinguished  and  precisely 
divided  classes,"  Every  theory  of  distribution  from  Adam  Smith's 


22  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

time  had  stated  this  assumed  differentiation  based  on  the  presence 
of  three  industrial  classes  in  England. 

The  originality  of  Marx  may  be  brought  to  the  test  in  another 
way.  Dr.  Small  asserts  that  socialism  is  ninety  per  cent  Karl  Marx 
and  ten  per  cent  his  followers, thus  leaving  no  place  for  his  predecessors. 
Then  Dr.  Small  goes  on  to  say,  speaking  for  the  present  age:  "We 
assert  the  universal  fact  of  class  conflict  as  strongly  as  he  did.  We 
assert  the  universal  fact  of  cooperation  more  strongly  than  he  did." 
This  implies  that  class  conflict  is  the  older  doctrine  and  that  the  belief 
in  cooperation  has  its  origin  in  later  times.  But  why  not  give  credit 
to  the  earlier  socialists  who  did  so  much  to  promote  cooperation? 
Do  we  assert  the  universal  fact  of  cooperation  more  strongly  than 
Robert  Owen  did?  If  Dr.  Small  had  stated  the  real  order  of  the  prog- 
ress of  thought  as  from  cooperation  to  class  struggle,  and  not  from 
class  struggle  to  cooperation,  it  would  have  been  apparent  that  the 
Galileo  claim  was  not  tenable.  From  struggle  to  cooperation  is 
progress;  from  cooperation  to  struggle  is  a  backward  movement. 
To  see  through  a  glass  dimly  may  be  a  virtue  but  to  shut  one's  eyes 
to  the  light  is  a  crime.  Did  Marx  have  before  him  the  benefits  of 
cooperation  and  consciously  ignore  them?  Is  the  man  who  under 
these  conditions  resorts  to  conflict  a  hero  or  a  demagogue?  As  we 
decide  these  questions  we  settle  the  claims  of  Marx  to  priority  and 
to  immortality. 

A  more  valid  statement  of  Marx's  claims  may  be  found  in  Cross's 
"Essentials  of  Socialism."  He  bases  scientific  socialism  on  nine  doc- 
trines: (a)  The  evolution  of  society;  (b)  the  economic  interpreta- 
tion of  history  and  the  doctrine  of  class  struggle;  (c)  the  Marxian 
labor  theory  of  value;  (d)  the  Marxian  theory  of  surplus  value; 
(e)  the  socialistic  explanation  of  crises;  (/)  the  right  of  labor  to  its 
full  product ;  (g)  the  theory  of  the  increasing  concentration  of  indus- 
try; (k)  the  theory  of  increasing  misery;  and  (i)  the  catastrophe 
theory.  From  these  we  get  a  glimpse  of  the  real  problems  with  which 
Marx  dealt  in  his  book  on  "Capital."  These  doctrines  are  not 
mere  commonplaces.  They  are  matters  of  long  standing  dispute 
and  are  still  open  to  discussion. 

The  real  difficulty  of  founding  a  revolutionary  economics  to 
displace  the  harmonies  so  much  amplified  by  early  economists  is 
made  even  clearer  by  an  additional  list  of  discarded  economic  doc- 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  23 

trines.     They  show  the  difficult  position  in  which  Marx  found  him- 
self when  he  sought  to  revolutionize  economic  thought. 

The  doctrine  of  overproduction. 

The  transformation  of  money  into  capital. 

Labor  checks  in  the  place  of  money. 

Labor  as  the  source  of  wealth. 

The  elimination  of  small  producers. 

The  growth  of  landed  estates. 

The  fall  of  wages. 

The  failure  of  cooperation. 

The  crushing  of  trade  unions. 

The  increasing  severity  of  industrial  crises.  \ 

The  increase  of  unemployment. 

The  rapid  growth  of  population. 

The  relative  increase  in  numbers  of  the  proletariat. 

The  abolition  of  interest. 

The  passing  of  competition. 

The  right  to  work. 

I  have  not  stated  these  propositions  to  discuss  or  to  refute. 
They  show  the  task  that  Marx  undertook  when  he  attempted  to 
reconstruct  economic  theory.  Can  they  be  blended  into  a  coherent 
scheme  or  are  they  a  series  of  contradictory  propositions  that  no 
thinker  can  harmonize  ?  They  readily  fall  into  two  groups.  The  one 
turns  on  the  theory  of  class  conflict  and  its  force  in  creating  social 
progress.  Such  propositions  are  sociological  in  character  and  since 
Marx's  time  have  been  incorporated  in  the  science  of  sociology.  I 
shall  not  discuss  them  because  they  lie  in  a  disputed  realm  where 
differences  of  opinion  are  allowable.  Sociology  and  economics  have 
yet  to  wrestle  for  the  supremacy  and  in  the  meantime  Marx  should 
have  what  credit  comes  from  the  fact  that  he  anticipated  the  trend  of 
events  that  gives  sociology  its  present  place.  But  this  does  not  give 
him  standing  as  an  economist.  To  show  that  progress  comes  through 
race  and  class  struggle  is  one  thing;  it  is  quite  another  to  show  that 
wealth  grows  through  the  exploitation  of  labor,  or  that  its  source 
is  to  be  found  in  the  toil  of  the  proletariat.  Has  he  proved  that 
money  can  be  transformed  into  capital,  or  that  competition  is  decreas- 
ing ?  Have  the  trade  unions  been  crushed  and  is  voluntary  coopera- 


24  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

tion  a  failure?  Have  landed  estates  grown  in  size  and  have  wages 
fallen  ?  It  is  with  these  problems  that  Marx  wrestles  in  his  ' '  Capital ' ' 
and  he  failed  to  solve  them  just  as  other  would-be  economists  before 
and  since  his  time  have  failed. 

These  propositions  are  not  new  to  the  American  public.  They 
have  been  up  for  discussion  in  a  dozen  presidential  campaigns  and 
they  will  doubtless  reappear  until  a  sound  public  opinion  replaces 
the  confusion  now  prevalent.  The  difference  between  Marx  and  the 
American  radical  does  not  lie  in  the  positions  taken  but  in  the  rem- 
edies to  be  applied.  All  of  the  elements  of  the  catas trophy  doctrine 
have  been  frequently  amplified  in  the  discussions  of  paper  money 
and  in  the  literature  of  protectionism.  The  catastrophe  of  hard 
times  can  be  remedied  by  a  free  use  of  paper  money,  said  the  one 
group,  while  the  other  said  that  protection  was  the  cure  of  low  wages. 
Marx  has  another  remedy  but  no  new  arguments,  nor  did  he  discover 
any  new  defects  in  capitalism  not  found  by  his  predecessors.  From 
the  arguments  used  in  a  campaign  for  state  socialism,  a  returning 
ancestor  might  imagine  that  the  dispute  was  about  paper  money. 
Put  "capital"  in  the  place  of  the  "money  power"  and  the  fervent 
orations  of  to-day  would  have  been  understood  forty  years  ago. 
Our  ancestors  would  be  familiar  with  all  of  them;  they  would  be 
puzzled  only  about  our  remedy. 

Had  Marx  succeeded  as  an  economist,  the  position  of  the  con- 
tending groups  would  be  radically  altered.  As  it  is,  every  doctrine 
claiming  that  progress  comes  by  slow  evolution  has  gained  ground. 
Many  theorems  can  now  be  proved  that  were  mere  matters  of  con- 
jecture and  prophecy  in  1848.  The  change  from  the  meager  data 
of  that  age  to  present  attested  facts  shows  that  Marx  was  a  bad 
theorist  and  a  worse  prophet.  Socialism  is  either  sociology  or 
economics.  As  thinkers,  socialists  must  get  into  the  one  group  or 
the  other  and  as  they  choose  they  must  accept  the  premises,  the  logic 
and  the  conclusions  of  the  group  they  join.  The  compromise  between 
sentiment  and  thought  is  in  the  future,  and  the  credit  for  the  new 
harmony  belongs  to  some  still  unborn  thinker.  As  there  is  no  defi- 
nite socialistic  thought  apart  from  its  sociological  postulates  so  there 
is  no  socialistic  program.  Each  new  wave  of  socialistic  sentiment 
sets  up  some  new  goal  or  suggests  some  new  compromise  with  capi- 
talism. There  are  as  many  of  these  as  there  are  fluctuations  in  the 
industrial  situation  that  produces  them.  As  an  arouser  of  emotion, 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  25 

socialism  is  a  success,  but  in  the  formulation  of  thought,  it  is  failing 
exactly  as  Marx  failed.  In  the  meantime  capitalistic  production 
has  increased  the  stability  of  industry  and  reduced  the  suffering 
coming  from  famine,  contagious  disease  and  the  lack  of  employment. 
It  has  shown  the  power  of  voluntary  social  organization  and  has 
justified  the  hopes  of  Adam  Smith  and  Robert  Owen  that  coopera- 
tion could  gain  a  victory  over  national,  local  or  class  interests. 


V.     TYPES  OF  AMERICAN  SOCIALISM 

During  the  last  century  socialism  presented  itself  in  two  radi- 
cally different  forms.  One  of  these,  represented  by  the  early  English 
writers,  is  called  sentimental  socialism  because  of  its  opposition  to 
misery,  or  voluntary  socialism  because  it  appealed  to  voluntary 
organizations  rather  than  to  the  coercive  power  of  the  state.  In 
contrast  to  this  is  the  Marxian  socialism  appealing  not  to  the  co- 
operative spirit,  but  to  fear,  coercion,  class  and  race  hatred.  Revo- 
tionary  ideas  were  never  so  widespread  nor  seemingly  so  dangerous 
as  when  Marx  began  his  agitation  in  favor  of  the  toilers.  Since 
1848  evolution  has  replaced  revolution  and  thus  caused  a  radical 
alteration  of  social  methods  and  programs.  We  have  now  had 
sixty  years  of  this  newer  development  and  we  should  base  our  judg- 
ments of  it  on  current  facts,  not  on  antiquated  history.  We  can 
thus  measure  the  successes  and  failures  of  the  several  types  of  social- 
ism now  influencing  American  opinion. 

In  its  early  history,  state  socialism  represented  the  demands 
for  the  nationalization  of  industry  on  the  one  hand,  and  an  equality 
of  wages  on  the  other.  Neither  of  these  ends  has  been  attained,  nor 
are  we  any  nearer  their  attainment  than  we  were  sixty  years  ago. 
State  ownership  now  means  not  the  abolition  of  capitalism  but  the 
equalization  of  profits.  State  railways  mean  small  profits  on  trans- 
portation and  larger  profits  to  the  transporters.  An  increase  of 
profits  has  gone  along  with  this  movement  and  in  no  way  has  the 
development  of  capitalism  been  interfered  with.  There  is,  however, 
another  form  of  socialism  not  yet  harmonized  with  capitalism.  I 
will  call  this  movement  street  socialism  because  it  represents  the 
attitude  of  the  toilers  who  feel  their  interests  opposed  by  present 
tendencies.  It  is  the  emotional  reaction  of  the  oppressed  classes, 
and  is  bound  to  take  more  vivid  and  forceful  forms  until  it  either 
succeeds  or  fails.  I  do  not  venture  to  predict  the  outcome,  but 
it  is  apparent  that  the  group  is  divided  into  two  antagonistic 
classes,  one  demanding  state  action,  and  the  other,  direct  action. 
Between  the  two  are  irreconcilable  differences  which  are  bound  to 
express  themselves  in  the  conflicts  of  the  future.  But  even  if  the 
two  groups  remain  united,  they  can  represent  but  a  minority  of  the 
American  people.  From  them,  there  is  no  danger  of  social  revolu- 

(26) 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  27 

tion.  They  must  either  disappear  in  a  hopeless  struggle  or  be  trans- 
formed and  incorporated  into  society. 

Socialism  is,  therefore,  not  an  anticipated  evil  but  an  intense 
form  of  social  activity.  During  the  last  sixty  years  the  individual 
has  been  lost;  the  group  is  now  everything.  While  there  has  been 
an  effective  demand  for  the  equalization  of  profits,  there  has  been 
no  strong  movement  for  the  equalization  of  income.  The  changes, 
therefore,  mean  that  the  small  capitalist  has  gained  an  advantage 
over  the  large  capitalist  on  the  one  hand,  and  the  laborer  on  the 
other.  There  has,  however,  been  a  steady  rise  in  profits  and  an 
increasing  socialization  of  capitalism.  There  has  also  been  a  change 
of  emphasis  from  wages  to  the  improvement  of  objective  social  con- 
ditions. The  non-Marxian  attitude  has,  therefore,  won  out.  Marx 
may  continue  a  myth  and  a  terror  to  the  uninformed,  but  the  type 
of  thinking  he  introduced  belongs  to  the  past  rather  than  to  the 
present.  In  spite  of  the  earnest  efforts  which  he  and  his  co-workers 
have  made,  a  class  consciousness  has  not  been  aroused.  The  only 
nation  of  which  the  contrary  seems  to  be  true  is  Germany  where  the 
massing  of  the  laborers  in  one  group  is  due  more  to  political  oppres- 
sion than  to  economic  exploitation. 

Voluntary  socialism,  however,  has  succeeded  to  a  far  greater 
degree  than  has  the  Marxian  program.  In  two  important  respects, 
it  has  failed.  One  of  these  is  agricultural  communism.  The  second 
failure  is  that  of  profit  sharing.  Some  schemes  for  profit  sharing 
have  been  moderately  successful;  it  may  be  true  in  the  coming 
age  that  profit  sharing  will  really  become  important,  but  as  a  whole, 
it  must  be  regarded  as  a  failure.  In  other  fields,  however,  success 
has  been  marked, — probably  more  than  elsewhere  in  what  can 
properly  be  called  municipal  trading.  Neither  of  the  earlier  forms 
of  socialism  foresaw  the  future  of  cities  and  consequently  did  not 
realize  the  problems  that  the  growth  of  cities  would  bring.  Muni- 
cipal trading  must  be  regarded  as  voluntary  socialism  because  each 
community  elects  what  forms  of  cooperative  enterprise  it  will  sup- 
port. It  is  also  plain  that  municipal  socialism  is  not  opposed  to 
capitalism,  but  is  really  an  extension  of  it.  It  is  a  scheme  for  the 
equalization  of  profits  because  it  results  in  an  extension  of  the  power 
of  the  small  capitalist. 

The  earlier  socialists  thought  the  field  of  socialism  to  lie  in 
schemes  for  elevating  the  toilers.  Such  schemes  have  failed. 


28  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

If  they  had  thought  of  their  projects  as  a  means  of  socializing  the 
capitalists,  they  would  have  been  the  prophets  of  a  new  epoch. 
The  striking  fact  of  recent  industrial  organization  has  been  the 
socialization  of  the  groups  that  control  them.  The  system,  the  in- 
terests, the  money  power,  the  trusts  have  bad  features,  but  they 
represent  the  socialization  of  the  groups  interested  in  particular 
fields.  The  growth  of  large  scale  capitalism  has  resulted  in  the 
elimination  of  the  unsocial  capitalist  and  the  increasing  control  of 
each  industry  by  a  socialized  group.  This  group  may  not  represent 
public  interests,  but  it  is  a  voluntary  organization  with  intense, 
cooperative  spirit.  No  one  to-day  can  succeed  in  industry  who 
does  not  attach  himself  to  some  well-defined  industrial  group. 
Every  city,  likewise,  has  many  social  groups  working  for  its  improve- 
ment; even  the  trades  unions  succeed  as  voluntary  organizations. 
College  spirit  is  another  manifestation  of  the  same  tendency  and  is 
becoming  one  of  the  social  forces  of  the  present.  Philanthropy,  in 
its  constructive  forms,  is  also  voluntary  and  represents  the  growth  of 
social  sentiment.  There  is  no  form  of  self -improvement,  of  recrea- 
tion, or  amusement,  that  does  not  follow  the  same  general  lines  and 
appeal  through  voluntary  means  for  the  organization  of  the  people 
interested  in  each  field.  This  socializing  tendency  has  produced 
great  changes"  and  will  increase  in  intensity  during  the  coming  epoch. 
There  is  no  probability,  therefore,  that  voluntary  socialism  will  be 
displaced,  nor  is  its  importance  likely  to  be  diminished  by  any 
change  in  state  control. 

With  this  marked  change  in  the  form  of  cooperative  movemeuts 
has  also  gone  a  reorganization  of  our  social  sentiments.  To-day, 
sentiment  shows  itself  either  as  race  and  class  hatred,  or  as  altruistic 
enthusiasm.  At  bottom  altruistic  sentiment  is  the  feeling  of  a 
capitalist  expressing  itself  in  sympathy  for  the  laborer.  This  desire 
of  upper  class  men  to  improve  the  conditions  of  the  lower  classes 
is  a  radically  different  phenomenon  from  the  pressure  exerted  by  the 
lower  classes  for  their  own  betterment.  The  lower  class  movement 
stands  for  the  control  of  the  state  by  themselves  in  their  own  interests. 
The  upper  class  movement  directs  itself  against  the  bad  environ- 
mental conditions  preventing  the  expression  of  character.  Every 
lowering  of  the  standard  of  life,  and  every  increase  in  the  misery 
due  to  objective  conditions  is  seen  to  mar  character  or  to  prevent 
its  expression. 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  29 

This  upper  class  movement  has  expressed  itself  in  various  ways, 
none  of  which  is  adequate  to  represent  its  real  force.  To  call  such 
men  Utopists  is  to  misrepresent  them.  To  call  them  sentimental 
merely  emphasizes  one  part  of  the  movement.  Historically  they 
could  be  called  literary  socialists  because  most  of  their  writings  have 
been  put  in  a  literary  form.  Neither  of  these  terms  expresses  the 
current  movement  because  they  do  not  call  attention  to  the  great 
change  that  is  taking  place  in  the  college  world.  Better  than  any- 
thing else,  this  altruistic  movement  could  be  called  collegiate  social- 
ism because  universities  and  colleges  are  the  centers  of  its  propaga- 
tion. College  life  is  now  emotional  rather  than  rational.  Fifty  years 
ago  college  students  argued;  to-day  they  shout  and  sing.  A  corre- 
sponding change  has  taken  place  in  the  teaching.  The  old  economic 
teacher  had  a  dozen  or  twenty  students  in  his  classes  with  whom  he 
argued  from  rational  premises.  Elementary  politics  and  economics 
are  now  taught  in  large  classes.  No  one  can  argue  with  one  hun- 
dred students.  My  experience  is  that  forty  is  the  upper  limit,  and 
it  is  difficult  when  the  classes  go  above  twenty.  This  means  that  the 
college  professor  must  appeal  to  the  sentiments  and  emotions  of  his 
hearers.  He  must  orate  rather  than  argue.  The  emotional  appeal 
also  demands  that  he  put  before  them  the  sentiments  most  likely 
to  be  active  in  the  minds  of  his  pupils.  Three  words  more  than  any- 
thing else  represent  the  possibilities  of  arousing  enthusiasm, — graft, 
misery  and  exploitation.  A  type  of  emotional  activity  is  thus  devel- 
oped in  college  life  that  is  potent  in  socializing  American  thought. 
Its  moral  program  can  be  summarized  as  the  regeneration  of  char- 
acter and  its  economic  program  is  the  abolition  of  poverty.  State 
socialism  has  as  its  political  program  the  square  deal  and  as  its 
economic  program,  the  equalization  of  profits.  These  two  programs 
form  evolutionary  socialism,  which  is  the  same  as  progressive  democ- 
racy.- There  is  no  difference  at  the  present  between  socialism  and 
democracy.  When  a  progressive  democrat  maps  out  a  program,  it 
is  the  same  as  the  program  of  an  evolutionary  socialist.  The  two 
views  are  bound  to  coalesce  and  from  their  blending  a  new  political 
party  will  arise  giving  a  socialistic  trend  to  American  development. 

The  power  of  socialism  is  but  partially  revealed  in  this  move- 
ment. Distinct  from  and  yet  blended  with  it  is  a  socialism  revolu- 
tionary in  character.  It  may  be  called  sociological  socialism  because 
sociological  concepts  are  at  its  basis.  Social  thought,  we  are  told, 


30  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

is  impressed  by  the  action  of  a  dominant  class.  Any  change  in  social 
control  would  then  result  in  a  revolution  of  social  traditions,  laws  and 
morality.  If  institutions  have  been  imposed  by  the  wealthy  for  their 
own  advantage,  socialism  by  overthrowing  capitalism  would  bring 
a  new  group  of  social  institutions,  displacing  the  now  dominant 
economic  morality.  This  is  the  sociological  argument  for  revolu- 
tion. A  new  motive  for  a  revolution  is  thus  introduced  which  is 
not  a  part  of  the  collegiate  socialism  already  described.  Many 
dislike  the  restraints  of  current  econoimc  morality  and  of  the  social 
institutions  that  enforce  them.  It  is  thus  made  to  look  as  if  economic 
restraints  were  temporary  expedients  rather  than  permanent  neces- 
sities. Of  these  the  most  vital  is  the  sex  restraint  that  economic 
progress  has  enforced.  Each  advance  in  family  life  has  added  to  the 
severity  of  this  pressure  until  sex  motives  are  in  open  war  with  the 
dominant  morality.  The  revolt  against  sex  restraint  is  widespread 
and  is  promoted  in  indirect  ways  more  effectively  than  if  openly 
stated.  It  is  especially  prominent  in  magazines,  novels  and  the 
new  drama.  As  literature  becomes  social,  it  takes  this  form  and 
carries  with  it  a  revolutionary  attitude  that  may  become  dangerous. 
Sex  freedom  is  too  deep  a  force  to  yield  without  a  struggle.  The 
issue  between  sociological  and  economic  premises  will  probably 
come  here  earlier  than  elsewhere,  but  come  it  must  and  the  sooner 
the  better. 


VI.     AN  INTERPRETATION  OF  JOHN  STUART  MILL 

Before  proceeding  to  an  analysis  of  economic  theory,  the  influence 
of  John  Stuart  Mill  in  shaping  economic  thought  must  be  considered 
and  also  it  must  be  seen  in  what  relation  he  put  himself  to  the  two 
economic  schools  of  his  time. 

One  of  these  groups  was  the  sentimental  economists  whom  we 
have  already  described.  The  second  group  is  known  as  the  logical 
or  orthodox  economists  from  the  fact  that  they  appealed  to  logical 
method  in  developing  their  theories.  In  reality,  however,  they 
were  as  sentimental  as  their  opponents.  The  appeal  of  the  Utopists 
was  to  general  social  interests.  Neither  nationality,  class  nor 
personality  obtruded  themselves  in  their  discussions.  The  success 
of  the  logical  economists  was  due  not  to  their  logic  but  to  the  domi- 
nance of  the  capitalists  whose  sentiments  they  voiced.  The  growing 
influence  of  the  capitalistic  class  was  opposed  to  the  Utopian  econo- 
mists because  they  demanded  improvements  in  the  conditions  under 
which  laborers  lived  and  worked.  This,  if  carried  out,  would  mean  a 
fall  in  profits.  On  the  other  hand,  the  capitalists  were  interested 
in  free  trade,  but  more  than  anything  else  in  the  capitalistic  control 
of  the  nation.  Anything,  therefore,  that  emphasized  the  importance 
of  capital  to  social  progress  had  their  ardent  support. 

But  why  did  Mill  become  a  defender  of  logical  economics  when 
his  real  sentiments  lay  with  the  opposing  school?  In  solving  this 
problem,  it  is  fortunate  that  Mill  wrote  a  truthful  autobiography 
and  also  that  his  books  are  so  accessible  that  the  growth  of  his 
ideas  can  be  readily  traced.  Until  1832  Mill's  interest  was  pri- 
marily in  political  reform.  He  was  one  of  those  who  helped  to 
bring  about  the  reform  bill  of  that  year.  For  the  next  ten  years  his 
interest  was  in  logic,  not,  however,  logic  of  the  older  type,  but  induc- 
tive logic,  and,  if  we  accept  his  statements,  social  logic,  for  the 
last  section  of  his  logic  relates  to  the  premises  and  concepts  of  social 
science.  If  we  take  this  final  section  of  his  "Logic"  to  indicate 
Mill's  anticipation  of  what  was  next  to  be  done  in  social  science,  it 
is  plain  he  intended  to  proceed  on  an  inductive,  historical  and  socio- 
logical basis.  Why  did  not  Mill  carry  out  this  plan  so  clearly  expressed 
in  his  ' '  Logic  ?"  Why  did  he  endeavor  to  make  economics  a  deductive 
science  instead  of  making  it  historical  and  inductive?  Something 
must  have  happened  between  1842  and  1848  to  change  his  attitude, 

(31) 


32  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

and  to  cause  him  to  rehabilitate  a  method  that  he  had  so  skilfully 
overthrown. 

To  find  the  cause  of  this  change  one  must  look  into  the  current 
discussions  to  see  the  position  in  which  Mill  found  himself.  He  had 
expected  to  proceed  historically,  but  he  found  that  his  favorite 
doctrine  could  not  be  historically  defended.  The  way  to  find  what 
use  was  being  made  of  historical  proof  at  that  time  is  to  read  the  works 
of  Carey.  His  method  consists  in  taking  a  mass  of  heterogeneous 
illustrations  from  every  clime  and  age,  and  aggregating  them  together 
to  prove  pre-conceived  doctrines.  He  has  no  hesitation  in  traversing 
the  world  from  America  to  India,  or  history  from  the  present  day 
back  to  Adam,  to  pick  out  illustrations  that  seem  to  enforce  his  doc- 
trine. This  is  historical  sociology  in  its  crudest  form,  but,  at  the 
same  time,  it  was  very  effective  for  it  served  as  a  basis  for  the  protec- 
tionist doctrines  then  developing.  Its  influence,  therefore,  was  tre- 
mendous. I  do  not  see  how  free  trade  or  sound  money  could  have 
been  defended  on  historical  grounds.  No  one  of  Mill's  favorite  doc- 
trines could  be  thus  defended.  Either  he  must  give  up  the  economics 
to  which  his  traditions  bound  him,  or  he  must  abandon  the  method  he 
had  outlined  and  revert  to  the  methods  of  his  father  and  Bentham 
from  whom  his  education  had  come. 

A  second  method  of  utilizing  history  is  represented  by  the  Ger- 
man economists.  They  avoid  the  crudity  of  Carey's  position,  but 
do  it  at  the  expense  of  general  principles.  German  thought  is 
intensely  national,  and  has  as  its  basis  the  concept  of  the  superiority 
of  the  German  race.  Accepting  these  two  premises,  good  history 
is  German  history.  Everything  that  does  not  incorporate  itself  into 
German  thought  is  bad  doctrine.  There  is  a  conscious  depreciation 
of  other  races  especially  of  the  English  and  the  Jews.  This  makes  an 
historical  movement  of  thought  which  is  correct  in  so  far  as  German 
thought  represents  the  growth  of  civilization  but  is  erroneous  as  soon 
as  progress  of  civilization  ceases  to  be  German.  Such  an  attitude 
it  would  have  been  impossible  to  introduce  into  England  because  the 
English  did  not  have  a  like  concept  of  their  national  continuity  and 
superiority.  The  best  statement  of  the  German  viewpoint  is  to  be 
found  in  a  recent  book  written  by  an  Englishman,  but  one  who  has 
thoroughly  indoctrinated  himself  with  German  concepts.  This  is 
Chamberlain's  "Foundations  of  the  Nineteenth  Century."  In  it 
is  found  the  race  emphasis  so  telling  in  German  thought,  and  the 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  33 

contrast  between  the  German  and  other  national  groups.  This 
method  of  procedure  was  clearly  out  of  Mill's  reach.  He  was  forced 
to  abandon  such  schemes  since  they  would  not  appeal  to  the  English 
public  in  the  way  that  logical  concepts  did.  Between  English 
historicalism  and  English  logical  method,  there  was  really  no  choice. 

There  was  a  third  alternative  which  doubtless  Mill  saw  but  was 
also  unable  to  carry  out.  This  viewpoint  is  represented  to-day  by  the 
theories  of  Marx.  It  rejects  the  capitalistic  premises  but  retains 
the  pessimistic  part  of  Mill's  philosophy.  It  is  German  thought 
over  again  except  that  the  doctrine  of  continuity  is  the  continuity 
of  the  laboring  class,  and  not  the  continuity  of  the  German  race. 
Mill  had  drawn  the  contrast  between  capital  and  labor  but  he  was 
unwilling  to  carry  it  to  a  point  that  would  lead  to  the  exclusion  of  one 
or  the  other. 

It  is  plain  that  all  these  historical  methods  were,  in  some  form, 
in  Mill's  mind  when  he  decided  to  abandon  historical  economics 
and  resort  to  a  logical  defense  of  fundamental  truth.  The  genesis 
of  logical  method  as  understood  by  Mill  and  defended  by  subsequent 
economists  is  primarily  based  on  the  doctrines  of  Newton  and  Ben- 
tham.  The  concept  of  one  fundamental  law  controlling  all  social 
phenomena  is  derived  from  the  law  of  gravitation,  but  the  method 
by  which  this  could  be  used  as  the  basis  of  economic  thought  comes 
from  Bentham.  Bentham  assumed  that  men  were  controlled  by 
two  motives,  pleasure  and  pain,  and  that  all  of  their  acts  were  con- 
sequences of  these  two  forces.  The  transference  of  this  idea  into 
economics  comes  through  a  process  of  substitution  by  which  in  the 
place  of  pain  is  put  economic  cost,  and  in  the  place  of  pleasure,  the 
value  of  economic  goods.  Goods  are  thus  made  the  center  of  economic 
discussion.  They  sell  for  their  costs;  they  are  bought  because  of 
their  value.  From  these  premises  is  derived  the  doctrine  that  costs 
equal  values.  Cost  is  labor.  If  the  quantity  of  labor  equals  the 
quantity  of  value,  then  all  values  have  an  economic  justification. 
From  this  premise  comes  a  better  justification  of  capitalism  than  any 
historical  deduction  could  give  it.  The  subsequent  use  of  calculus  by 
Jevons  has  disproved  this  conclusion;  to-day  no  one  can  claim  logical 
support  who  assumes  that  costs  and  values  are  equal.  But  in  Mill's 
time  no  one  realized  how  subsequent  argumentation  would  turn. 
Their  education  did  not  include  calculus  and  their  sentiments  were 
capitalistic. 


34  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

Even  if  Mill  did  emphasize  logical  method,  it  was  impossible 
for  him  to  make  his  social  system  logical.  No  discussion  is  clearly 
carried  through  to  its  logical  consequences.  He  starts  his  argument 
from  logical  premises  and  draws  logical  conclusions  in  the  first  sections 
of  each  chapter.  He  then  shifts  his  viewpoint  until  in  the  final  sec- 
tions his  social  views  stand  out  prominently.  An  examination  of  his 
method  makes  it  plain  that  his  final  conclusions  are  not  deductions 
from  his  original  principles  but  are  due  to  the  insertion  of  new  ideas 
and  a  new  point  of  view  into  a  discussion  which  if  logical  would  have 
carried  Mill  to  opposite  conclusions. 

Our  present  viewpoint  is  more  serviceable  than  the  confused 
views  of  Mill's  time  to  show  the  defects  of  his  method.  His  choice 
lay  between  the  crude  historical  method  familiar  to  the  English  public 
and  a  resort  to  deduction  in  harmony  with  the  views  of  his  contem- 
poraries. We  have  new  possibilities  because  of  better  statistics. 
Deductive  conclusions  now  have  little  weight  unless  use  is  made  of 
present  facts  to  verify  them.  We  thus  have  a  check  on  dogmatic 
reasoning  that  was  not  available  to  Mill.  The  recognition  of  an  eco- 
nomic interpretation  of  history  creates  the  same  sort  of  a  check  to  loose 
historical  deductions  that  the  statistical  method  gives  to  deductive 
thought.  We  should  not  blame  Mill  for  not  foreseeing  these  develop- 
ments of  method.  The  blame  is  only  to  those  who  in  an  age  with 
better  methods  neglect  to  use  them. 

The  logical  method,  however,  has  been  of  importance  in  two 
respects.  It  has  emphasized  both  rent  and  profits  and  has,  therefore, 
brought  out  the  difference  between  earned  and  unearned  income. 
It  has,  however,  failed  in  various  ways  because  Mill's  thought 
is  based  on  two  antagonistic  economies, — the  agricultural  economy 
of  Adam  Smith  and  the  commercial  economy  of  Ricardo's  time. 
In  an  agricultural  economy  rent  is  contrasted  with  wages.  Rent, 
therefore,  becomes  an  unearned  increment;  wages  include  the 
return  for  all  human  efforts.  Such  a  contrast  is  clear  and  the  con- 
clusions drawn  from  it  are  sound  so  long  as  the  deductions  are  made  in 
regard  to  a  purely  agricultural  economy.  In  the  commercial  economy, 
however,  rent  is  lost  sight  of.  The  opposition  is  between  profits 
and  wages.  In  this  contrast  wages  do  not  include  all  efforts  of  indus- 
trial society,  but  only  the  efforts  of  the  toiling  underpaid  workers. 
Within  profits  are  included  all  of  the  industrial  efforts  of  the  capital- 
istic class.  In  the  commercial  economy  one  cannot,  therefore,  say 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  35 

that  wages  are  the  reward  of  labor.  They  are  the  pay  of  inefficient 
workers.  Sometimes  Mill  uses  labor  in  one  sense,  sometimes  in 
another.  Sometimes  wages  are  but  a  class  reward.  Sometimes  they 
are  the  pay  of  all  workmen.  So  long  as  this  confusion  remains, 
no  clearly  defined  theory  of  distribution  can  be  developed.  Mill 
and  his  followers  slipped  back  and  forth  between  the  two  viewpoints 
and  their  conclusions  are  invalid  because  of  the  vagueness  of  their 
premises.  There  was  no  logical  attempt  to  restate  the  theory  of 
distribution,  until  Henry  George's  "Progress  and  Poverty."  There 
we  find  the  famous  formula:  Produce  =  rent-\-interest-\-wages.  If 
these  three  terms  are  carefully  defined,  there  would  arise  a  logical 
view  of  the  problems  of  distribution.  This  later  stage  of  develop- 
ment, however,  does  not  belong  to  Mill's  epoch,  but  must  be  consid- 
ered in  a  chapter  by  itself. 


VII.     THE  FAILURE  OF  THEORIES  OF  DISTRIBUTION 

It  is  impossible  to  understand  either  the  theories  of  distribution 
now  prevalent  or  the  sentiments  that  lie  back  of  them  without 
giving  attention  to  earlier  industrial  societies.  In  primitive  times 
the  contrast  was  between  lord  and  slave  or  lord  and  serf.  Later 
it  became  a  contrast  between  landlord  and  tenant  and  then  between 
the  leisure  class  and  a  working  class.  If  we  regard  these  various 
contrasts  as  creating  economics,  it  is  proper  to  speak  of  a  slave 
economy,  a  cultural  economy,  an  agricultural  economy,  a  commercial 
economy  and  an  industrial  economy.  In  all  these  economies,  a  two- 
fold division  of  society  exists,  one  class  doing  the  work  and  the  other 
enjoying  the  profit  that  comes  from  the  industrial  situation.  In 
this  earlier  state,  the  contrasts  in  income  were  between  surplus  and 
cost,  between  profit  and  expense,  and  between  public  revenue  and 
private  gain.  The  first  of  these  alternatives  was  advocated  by  the 
dominant  leisure  class,  the  other  by  the  industrial  classes.  It  was 
natural,  therefore,  for  the  industrial  classes  to  give  an  emphasis  to 
labor  as  the  source  of  wealth  and  to  wages  as  the  one  rightful  income. 

In  modern  societies  the  problem  arises  of  transforming  wages 
and  labor  from  sentimental  feelings  to  economic  concepts.  The 
difficulty  in  this  comes  from  the  fact  that  in  a  primitive  economy 
there  are  only  two  classes  and  only  two  forms  of  income, — the  earned 
and  the  unearned.  When  wages  are  made  synonymous  with  earned 
income  its  claims  have  both  sentimental  and  logical  justification. 
In  an  industrial  society  the  capitalist  also  earns  an  income.  It  is, 
therefore,  impossible  to  use  the  term  "wages"  in  the  sense  that  it 
was  used  in  agricultural  nations.  In  an  industrial  economy  toil  is 
disappearing.  Progress  is  measured  by  the  displacement  of  the 
unskilled  toilers  and  not  by  the  increase  in  their  income.  The  prob- 
lem in  distribution,  therefore,  is  this :  are  wages  in  a  modern  society 
a  fund  having  a  natural  basis? 

The  three-fold  division  of  society  is  derived  from  the  three 
classes  present  in  England  when  economics  arose.  If  there  are  a 
landlord  class,  a  capitalistic  class,  and  a  class  of  workmen,  a  three- 
fold division  is  necessary.  If  one  of  the  three  disappears  only  a 
two-fold  division  will  explain  the  facts  of  distribution.  Which 
one  is  to  disappear  depends  on  the  kind  of  economy  dominant  in  each 

(36) 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  37 

nation.  A  pain  economy  or  a  downward  pressure  unites  landlords 
and  capitalists  thus  creating  a  leisure  class  as  opposed  to  the  working 
class.  In  a  pleasure  economy,  the  toilers  are  eliminated  or  trans- 
formed into  a  higher  class,  while  the  remaining  classes  blend  into  unity 
combining  leisure  and  work  in  agreeable  ways.  The  three-fold 
division,  therefore,  is  logically  and  genetically  defective.  The  logi- 
cal division  is  either  surplus  value  and  wages,  or  rent  and  wages. 
Genetically,  however,  it  can  be  said  that  rent  tends  to  disappear, 
profits  tend  to  disappear,  interest  tends  to  disappear,  or  wages  tend 
to  disappear.  All  four  of  these  propositions  have  some  proof.  The 
first  two,  however,  are  true  of  a  static  economy  and  the  last  two  of 
a  dynamic  economy.  Should  society  become  static,  there  would  be 
no  rent  or  profits;  the  whole  income  would  be  divided  between 
interest  and  wages.  If  a  dynamic  economy  should  continue,  interest 
and  wages  would  tend  to  disappear  and  the  whole  income  of  society 
would  be  distributed  as  rent  or  profits.  Work  would  be  a  pleasure, 
and  the  providing  for  the  future  a  joy.  Of  course,  this  is  Utopian, 
but  it  represents  tendencies.  In  any  society  either  profits  and  rent 
are  growing  and  interest  and  wages  decreasing,  or  wages  and  interest 
are  growing  and  profits  and  rent  decreasing.  This,  put  in  another 
way,  affirms  that  rent  represents  the  aid  that  nature  gives  to  man ; 
profits  represent  the  aid  of  invention  and  character.  Three  forces, 
therefore,  tend  to  the  improvement  of  mankind, — improved  nature, 
improved  industrial  mechanisms  and  improved  character.  The 
future  Utopia  will  have  little  toil,  and  much  leisure, 

The  origin  of  current  theories  of  distribution  was  more  acci- 
dental than  designed  because  the  three-fold  division  comes  from  the 
writings  of  Adam  Smith  in  which  it  is  presented  not  as  a  theory  of 
distribution  but  as  a  theory  of  prices.  It  was  the  elements  of  price 
and  not  the  factors  in  distribution  that  Smith  had  in  mind.  Prices 
rose,  he  thought,  as  rent,  profits  or  wages  increased  and  fell  when 
one  or  more  of  thme  were  decreasing.  He  assumes  that  progress 
means  a  fall  of  prices,  and  that  families  gain  their  advantage  by  the 
lower  price  of  goods  bought.  Under  these  conditions,  no  one  can 
obtain  an  advantage  over  others  through  prices  because  his  income 
accurately  represents  his  costs.  The  whole  gain  of  society  is  measured 
by  the  fall  of  prices.  The  confusion  arising  from  reasoning  based 
on  these  premises  is  due  to  the  fact  that  there  is  no  name  separating 
this  economy  from  societies  which  have  other  determining  forces 


38  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

than  those  of  price.  Price  has  no  adjective  form.  The  result  is 
that  economists  have  reasoned  about  prices,  and  then  have  applied 
their  conclusions  to  an  industrial  economy.  They  have  also  talked 
about  an  economic  man  when  really  their  logic  called  for  a  man 
whose  motives  were  determined  by  price.  To  prevent  confusion, 
I  shall  speak  of  a  price  economy  and  of  a  price  man.  In  this  way 
we  can  distinguish  the  narrower  economy  determined  by  price  from 
the  broader  economy  determined  by  industrial  conditions.  In  this 
price  economy,  the  population  gains  by  cheapness  and  not  by  the 
rise  of  income.  What  men  pay  represents  the  ultimate  difficulty  of 
attaining  goods.  In  this  society  is  neither  unearned  income  nor 
monopoly.  The  dominant  law  would  be  that  of  supply  and  demand 
and  the  ruling  tendency  would  be  towards  lower  prices.  I  say  this 
because  no  law  can  be  derived  from  price  changes  that  would  show 
whether  wages  are  increasing  or  decreasing.  Additional  facts  must 
be  added  to  those  of  a  price  economy  before  funds,  whether  of  wages, 
profits  or  rent,  can  be  isolated  and  contrasted.  Some  supplement 
to  the  laws  of  price  is  necessary  to  create  theories  of  distribution 
or  to  enable  economists  to  divide  income  into  funds,  be  they  many 
or  few. 

During  the  Ricardian  epoch,  the  laws  of  nature  are  made  to 
supplement  the  laws  of  price  and  to  create  theories  of  distribution. 
These  supplements  take  two  forms,  one  a  materialistic,  pessimistic 
attitude,  due  to  the  assumption  that  nature  is  failing.  The  other 
in  an  optimistic  form  contends  that  income  is  increasing  and  with 
it  a  progressive  social  state  is  forming.  In  the  first  group  are  the  law 
of  diminishing  returns,  the  law  of  population,  the  law  of  rent,  the  law 
of  industrial  concentration,  the  law  of  increasing  misery,  the  iron  law 
of  wages  and  the  law  of  physical  retrogression.  All  these  laws  have 
a  physical  background  and  in  them  the  basis  of  modern  theories  of 
distribution  is  to  be  found.  In  passing  from  the  pessimistic  to  the 
optimistic  attitude,  emphasis  is  given  to  another  group  of  doctrines 
based  on  genetic  tendencies  which  reveal  themselves  in  history. 
These  doctrines  include  the  disappearance  of  rent  and  profits, 
the  displacement  of  labor  by  capital,  the  rise  in  wages,  the  fall  of 
interest,  the  betterment  of  industrial  processes  and  the  appearance 
of  new  traits  in  man.  It  should  be  remembered  that  all  such  laws 
have  a  basis  somewhere  else  than  in  the  theory  of  prices.  The  laws 
of  distribution,  therefore,  depend  either  on  the  materialistic,  pessi- 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  39 

mistic  concepts  of  Ricardo  and  Marx,  or  on  genetic  laws  of  social 
progress.  One  or  the  other  is  to  be  found  in  every  writer  on  the 
distribution  of  wealth. 

The  defects  in  the  current  theories  of  distribution  are  again 
made  clear  by  questioning  the  reality  of  the  funds  into  which  income 
is  divided.  From  the  general  principles  of  industrial  progress,  it 
is  inevitable  that  both  rent  and  profit  should  arise.  It  raises  another 
problem,  however,  to  say  that  a  definite  amount  is  set  aside  for  the 
payment  of  wages.  There  are  in  reality  three  wage  doctrines  of 
this  sort  contending  for  supremacy — the  doctrine  of  an  increasing 
wage  fund  represented  by  the  American  economists  from  the  time 
of  Carey  to  the  present,  the  doctrine  of  a  stationary  wage  fund  rep- 
resented by  the  classical  economists,  and  the  doctrine  of  a  decreasing 
wage  fund  presented  in  the  writings  of  Marx  and  Henry  George. 
It  should  be  noted  that  proof  of  a  rising  statistical  wage  is  no  proof 
of  an  increasing  wage  fund.  The  statistical  wage  is  shown  by  com- 
bining the  stationary  wage  of  the  industrial  toilers  and  the  rising 
wage  of  efficient  workers.  This  may  give  a  rise  in  the  general  aver- 
age, but  it  does  not  prove  the  objective  existence  of  a  wage  fund. 

Wages  are  not  a  fund  having  one  origin,  but  the  complex  result- 
ant of  many  forces.  To  understand  the  organization  of  society, 
the  workers  who  use  machines  must  be  contrasted  with  the  toilers 
whose  industry  results  in  the  transformation  of  nature.  Machine 
tending  is  not  toil  unless  the  hours  of  work  are  abnormally  extended. 
The  transformation  of  nature  usually  is  toil  but  the  men  of  this  group 
represent  a  decreasing  proportion  of  the  whole  industrial  society. 
Workers  of  the  first  class,  get  a  wage  which  should  be  included  under 
rent  rather  than  under  wages  because  it  is  a  rent  of  ability.  They 
also  get  a  substitution  wage,  or  what  they  would  receive  if  they 
toiled  instead  of  tended  machines,  and,  thirdly,  they  get  an  organ- 
ization wage,  or  what  they  receive  from  collective  bargaining.  These 
three  elements,  the  wages  of  ability,  the  wages  of  substitution,  and 
the  wages  of  organization,  form  the  basis  of  their  income.  The  larger 
part  of  this  wage  must  be  regarded  as  either  rent  or  profits.  This 
makes  the  workers  who  receive  it  an  integral  part  of  a  capitalistic 
society.  They  have  as  much  interest  in  the  growth  of  the  social 
surplus  as  the  capitalists  have. 

The  toilers,  however,  do  not  even  get  a  subsistence  wage.  A 
wage  of  a  few  hundred  dollars  a  year  is  not  determined  by  the  needs 


40  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

of  subsistence  but  by  the  physical  endurance  of  those  who  receive 
it.  Continue  the  pressure,  and  the  class  must  die  out.  The  down- 
ward pressure  in  wages  equates  itself  by  raising  the  death  rate. 
Families  on  four  hundred  dollars  a  year  can  have  as  many  children 
as  they  please  without  increasing  population;  the  deaths  equal  the 
births.  Likewise  the  upward  pressure  due  to  increasing  standards 
of  life  gives  another  equilibrium,  brought  by  the  fall  of  the  birth 
rate.  At  a  family  income  of  fifteen  hundred  dollars  a  year,  the 
number  of  births  does  not  exceed  the  deaths  and  hence  population 
is  again  at  an  equilibrium.  There  is  thus  an  equilibrium  caused 
by  a  rising  death  rate  and  an  equilibrium  caused  by  a  falling  birth 
rate.  One  or  the  other  must  dominate,  and  as  it  does,  the  structure 
of  society  will  be  correspondingly  changed. 

These  facts  show  the  defects  of  the  current  theory  of  distribu- 
tion. The  real  cause  of  its  failure  lies  deeper.  Social  classes  have 
their  origin  in  struggle  and  between  them  no  economic  bonds  exist 
setting  limits  to  class  aggression.  Some  class  is  always  growing  while 
its  competitors  are  being  forced  to  the  wall.  The  movement  towards 
better  resources  or  into  industrial  centers  is  irresistible  and  ends 
only  when  the  dominant  group  crowds  out  its  competitors.  Had 
the  resources  of  the  world  remained  static  this  tendency  would  have 
long  ago  been  apparent.  New  resources  and  new  centers  ha\*e  repeat- 
edly disturbed  this  equilibrium  and  thus  renewed  the  old  struggle 
under  new  conditions. 

To  state  these  ideas  in  theoretical  terms  demands  the  use  of 
contrasts  not  familiar  to  Mill  and  his  contemporaries  who  recognized 
only  two  groups  of  laws, — the  laws  of  price  and  the  law  of  diminish- 
ing returns.  The  theory  of  evolution  has  made  us  familiar  with  a 
new  group  of  forces.  There  is  an  evolutionary  pressure  leading  to 
increasing  returns  as  well  as  the  devolutionary  pressure  called  dimin- 
ishing returns.  There  is  also  a  social  pressure  in  favor  of  human 
equality  that  partially  counteracts  the  effects  of  both  evolution 
and  devolution.  These  three  pressures  are  ever  in  operation,  each 
tending  to  produce  its  own  individual  effect  in  distribution.  Because 
of  them  there  can  be  no  equilibrium  of  economic  forces  nor  are  there 
definite  funds  to  be  divided  between  the  contending  classes  accord- 
ing to  natural  law.  This  failure  of  equilibrium  makes  a  new  treat- 
ment of  distribution  necessary. 


VIII.     A  RESTATEMENT  OF  THE  THEORY  OF  DISTRIBUTION 

Theories  of  distribution  have  been  built  on  a  common  plan. 
The  two  elements  are,  first,  the  social  classes  into  which  nations 
are  divided,  and  second,  the  funds  into  which  income  flows.  Each 
social  class  is  assumed  to  have  its  income  derived  from  specific 
sources.  Classes  therefore  have  definite  limitations  to  their  income 
which  prevent  them  from  taking  the  income  of  other  classes.  Within 
each  class  there  is  also  a  law  equalizing  income.  Profits  and  wages, 
we  are  told,  tend  to  equality  giving  just  shares  to  all  participants. 
This  theory  was  a  part  of  the  economic  harmonies  so  much  admired 
by  early  economists  and  while  modified  is  still  generally  held.  It 
corresponds  to  the  early  English  industrial  development  and  has  thus 
obtained  a  concrete  setting,  making  the  visualization  of  other  theories 
difficult.  In  criticism  of  it  the  first  question  is :  Are  the  traditional 
classes  in  England  the  outcome  of  social  struggle  or  are  they  real 
economic  groups?  The  second  question  is:  Can  there  be  an  equi- 
librium between  hostile  social  classes  or  must  not  each  temporary 
adjustment  be  a  compromise  that  is  disturbed  by  new  alignments  of 
the  contending  groups?  In  other  words,  is  all  struggle  within  indi- 
vidual classes  or  is  the  real  struggle  between  classes  some  of  which  are 
growing  at  the  expense  of  others?  In  this  case  there  cannot  be 
economic  funds  setting  bounds  to  class  aggression.  Some  group  is 
being  forced  to  the  wall  after  which  event  a  new  alignment  of  interests 
creates  new  victims  of  the  same  process.  Such  at  least  is  the  theory 
of  evolution,  and  by  it  the  theory  of  class  struggle  has  been  strength- 
ened. If  harmony  checks  struggle  some  compromise  has  been  worked 
out  between  the  discordant  groups.  Natural  law  forces  a  given  action 
at  all  times  and  places.  Compromise  is  temporary,  local  and  subject 
to  constant  revision.  Under  which  of  these  two  heads  does  the  income 
of  industrial  classes  come? 

In  seeking  an  answer  for  these  questions  in  America  the  observer 
finds  a  different  alignment  of  groups  from  what  the  early  English 
economists  found  in  their  day.  America  has  no  rent  class.  Land 
is  an  investment  and  its  income  is  not  distinct  from  that  of  capital. 
Few  know  what  part  of  their  income  is  rent  and  what  profit  or  interest. 
Landlords  and  capitalists  are  thus  blended  into  one  class  with  common 
views  and  interests.  While  this  blending  has  taken  place  a  new 
differentiation  has  arisen  among  the  laborers.  The  machine  workers 

(41) 


42  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

and  city  artisans  have  formed  organizations  through  which  a  redis- 
tribution of  income  in  their  favor  has  been  forced.  Below  them  are 
the  toilers  working  with  their  hands  or  with  crude  tools.  Their 
income  is  set  for  them  by  objective  conditions.  Workers  and  toilers 
in  this  contrasted  sense  are  non-competing  groups  whose  incomes 
arise  from  such  different  sources  that  any  one  name  is  confusing. 

The  application  of  English  theories  to  American  conditions  can 
be  tested  by  a  review  of  wage  arguments.  No  economist  has  said 
that  groups  of  workmen  could  not  acquire  a  super-wage.  Both  the 
existence  of  such  groups  and  the  power  to  perpetuate  themselves 
were  admitted.  It  was  contended  however  that  this  super-wage  was 
subtracted  from  a  wage  fund  and  hence  its  burden  fell  on  other 
workmen.  There  could  be  no  progress  except  by  a  rise  in  the  average 
wage.  The  reasoning  on  which  these  conclusions  were  based  runs 
as  follows :  If  a  given  group  acquired  a  super- wage,  the  rate  of  inter- 
est would  be  lowered  by  its  payment.  This  reduces  the  margin 
between  the  income  of  the  capitalist  and  his  expenditures.  The 
source  of  capital  is  frugality  which  demands  for  its  exercise  an  excess 
of  income  over  expenditure.  From  this  excess  all  increases  of  capital 
come.  If  it  is  reduced  by  the  payment  of  a  super-wage  the  increase 
of  capital  is  checked  and  the  growth  of  industry  retarded.  The 
natural  increase  of  population  would  not  be  provided  with  work; 
the  surplus  laborers  would  be  forced  back  into  the  established  indus- 
tries with  the  result  that  wages  would  fall. 

I  take  issue  not  with  the  logic  of  the  wage-fund  theorists, 
but  with  their  view  of  the  source  of  capital.  Capital,  they  said, 
is  savings  and  comes  from  a  reduction  of  the  expenditures  of  the 
capitalist  class.  There  must  be  a  group  with  social  standards  less 
than  their  income  to  permit  the  increase  of  capital.  I  would  say 
industrial  capital  arises  from  the  undivided  profits  in  newly-exploited 
industries.  In  them  a  super-profit  exists,  and  from  this  fund  the 
expansion  of  industry  takes  place.  No  one  would  deny  that  there 
is  a  super-profit  in  new  industries  and  that  in  seeking  employment 
for  it  the  newly-acquired  capital  flows  over  into  other  industries  and 
builds  them  up.  Is,  however,  this  source  of  capital  the  leading  one 
or  does  the  mass  of  new  capital  come  from  the  savings  of  those  who 
reduce  their  expenditures  below  their  annual  income?  This  is  the 
real  test  of  the  two  theories.  If  new  capital  comes  from  the  super- 
profit of  new  industries,  the  super-wage  of  other  industries  does  not 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  43 

fall  as  a  burden  on  other  workers  but  is  a  burden  on  profits.  Super- 
profits become  super-wages  by  a  change  in  prices  altering  values  in 
ways  favorable  to  industries  paying  super-wages.  The  super-wage 
is  thus  a  problem  of  prices  the  burden  of  which  falls  not  on  other 
workmen  but  on  whoever  loses  through  the  resulting  rise  in  values. 

I  would  go  further  and  assert  that  there  is  no  interest  fund 
because  no  equilibrium  exists  between  the  income  and  expenditures 
of  the  interest-receiving  class.  Interest  is  paid  on  investments  in  the 
hands  of  the  inheritors  of  vested  wealth.  This  class  is  not  the  source 
of  new  capital.  Instead  of  their  adding  to  capital  the  total  of  their 
investments  is  falling  off  and  in  each  generation  is  replaced  by  the 
new  inheritances  bequeathed  by  the  founders  of  new  industries. 
The  holders  of  fixed  investments  are  not  a  strong  class  held  firmly 
in  their  position  by  the  needs  of  other  classes.  They  are  economically 
a  weak  class  losing  to  the  benefit  of  other  classes  in  every  industrial 
contest. 

The  reasoning  of  the  wage-fund  theorists  was  a  selfish  upperclass 
view  of  those  who  wished  to  pose  as  humantarians  without  being  so. 
Why  should  the  receivers  of  a  super-wage  give  it  up  so  that  the  inheri- 
tors of  wealth  might  save?  If  saving  is  needed  could  they  not  as 
easily  save  from  their  super-wage  as  the  rich  could  from  their  invest- 
ments? It  is  not  necessary  to  raise  this  question  because  in  the 
main  super-wages  are  a  burden  on  the  super-profits  of  new  industries. 
They  fall  partly,  however,  on  all  who  must  in  consequence  pay  higher 
prices.  Inherited  wealth  bears  its  share,  the  general  consumer  has 
his  burden,  and  the  toiling  underclass  loses  employment  because  of 
the  slower  rate  of  industrial  progress. 

The  super-wage  does  not  fall  on  any  special  class  but  is  a  general 
burden  on  prosperity.  There  is  no  fund  set  aside  for  a  specific  class 
except  the  subsistence  fund  of  the  toilers.  Rent  and  profit  are  funds 
but  they  have  no  social  classes  to  claim  them.  They  are  diffused 
through  several  social  channels  and  fought  for  by  every  claimant  of 
social  advantage.  Economic  groups  do  not  therefore  have  funds 
given  them  by  natural  law.  They  must  enter  the  struggle  for  the 
general  surplus  getting  more  or  less  as  they  succeed  in  the  conflict 
that  ensues.  Each  new  equilibrium  is  a  compromise  lasting  until 
some  new  alignment  of  social  forces  breaks  it  down;  then  come  new 
adjustments  but  never  a  static  equilibrium  nor  any  fixed  funds 
distributed  by  natural  law. 


44  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

The  real  struggle  is  not  between  two  classes  but  between  two 
forms  of  industry.  Industry  either  exploits  some  general  advantage, 
in  which  case  its  surplus  is  profits,  or  it  exploits  local  advantage  the 
resulting  income  of  which  is  mainly  rent.  Centralized  industries 
divide  those  interested  in  it  into  two  classes,  the  controllers  who 
direct,  supervise  or  manage,  and  the  machine  workers  upon  whose 
activity  the  industry  depends.  The  one  class  is  interested  in  cen- 
tralized profits;  the  other  in  personal  super- wages.  Between  these 
two  forms  of  income  there  are  no  fixed  limits.  Either  can  grow  at 
the  expense  of  the  other.  Every  new  struggle  leads  to  a  new  com- 
promise in  which  some  advantage  conies  to  the  workers.  There  is  no 
profit-fund  that  will  check  this  advance  nor  is  there  a  wage-fund  to 
restrain  the  fall  of  wages  where  organization  fails.  Super-profits 
may  become  super-wages  or  super-wages  may  become  super-profits. 
Peace  and  progress  thus  come  not  from  natural  law  but  from  com- 
promise through  which  alone  any  working  equilibrium  is  possible. 

In  the  exploitation  of  local  advantage  another  mode  of  distribu- 
tion is  worked  out  which  unites  the  rent  of  situation  with  the  super- 
wage  of  efficiency.  A  working  capitalist  is  thus  evolved,  since  local 
industry  is  too  small  and  many-sided  to  permit  of  class  differentiation. 
Such  a  capitalist  does  not  think  of  his  joint  income  as  arising  from 
distinct  funds:  he  blends  it  by  a  recomposition  of  values  into  one 
fund  and  thinks  of  it  as  due  to  his  activity.  His  capital  and  his  land 
are  not  distinct  units  but  adjuncts  to  his  personality.  In  this  way 
a  distinctive  viewpoint  is  acquired  that  while  capitalistic  is  opposed 
to  that  of  centralized  industry.  To  make  a  working  capitalist  takes 
about  $5,000  in  capital  which  may  be  put  into  a  farm,  into  local  trade 
and  industry  or  into  personal  efficiency  through  education.  This 
means  an  income  of  from  $1200  to  $3000,  a  large  part  of  which  is  rent, 
but  which  is  regarded  as  wages  by  its  participants.  This  class  grows 
with  the  rise  of  rent  and  loses  with  the  increase  of  centralized  profits. 
A  line  can  thus  be  drawn  between  the  part  of  the  social  surplus  which 
localities  or  professional  men  hold  and  the  part  which  may  be  delocal- 
ized  and  depersonalized.  In  the  centralized  industries  work  and 
wealth  are  isolated.  In  the  localized  industries  they  are  united. 

Industrial  evolution  brings  increased  competition  for  the  better 
grades  of  land  and  for  the  higher  forms  of  personal  service  and  thus 
raises  personal  and  ground  rents  instead  of  lowering  prices.  If 
poorer  land  is  brought  into  use  by  progress  it  means  that  the  better 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  45 

land  is  being  put  to  some  higher  use  or  that  other  industries  are 
increasing  their  productive  power.  The  loss  through  increasing  rents 
is  more  than  offset  by  the  greater  profit  in  other  industries.  When 
we  recognize  that  rent  is  a  lien  on  profits  and  not  an  indication  of 
diminishing  returns,  we  see  that  its  growth  is  an  index  of  progress 
even  if  it  creates  for  favored  individuals  an  unearned  income.  Poor 
land  is  thus  discarded  or  put  to  some  lower  use.  In  a  like  manner 
the  growth  of  the  super-wage  indicates  an  evolution  by  which  the  less 
efficient  are  crowded  out  or  forced  into  less  effective  occupations. 
The  disuse  of  poor  land  and  the  lack  of  employment  of  inefficient 
laborers  is  a  part  of  every  forward  movement.  Evolution  brings  out 
latent  differences  in  both  land  and  men  and  emphasizes  the  better 
at  the  expense  of  the  poorer.  It  is  a  sign  of  progress  to  have  differen- 
tial incomes  increasing.  Evolution  helps  the  better  more  than  the 
worse. 

These  two  pressures  determine  the  natural  distribution  due  to 
objective  conditions.  Social  distribution  counteracts  the  results 
of  struggle  in  three  ways :  by  taxation,  by  the  organization  of  laborers, 
and  by  the  conservation  of  life  and  resource.  A  measure  of  equality 
is  thus  secured  but  never  enough  to  prevent  the  workings  of  evolution. 
Distribution  is  thus  complex,  following  no  one  law.  It  is  the  net 
result  of  many  laws  all  of  which  must  be  understood  before  a  solution 
can  be  reached.  Natural  law  is  but  an  element  in  the  final  result. 
Its  funds  dominate  in  primitive  distribution,  but  they  fail  to  explain 
the  facts  of  modern  industry. 

From  these  facts  and  the  resulting  modification  of  social  classes 
a  theory  of  distribution  arises  which  may  be  stated  as  follows :  There 
is  but  one  social  surplus  for  which  all  industrial  classes  contend  and 
among  whom  it  is  divided  not  in  definite  funds  but  in  parts  altered 
by  each  new  alignment  of  economic  forces.  At  first  this  surplus 
becomes  industrial  profits  through  the  increase  of  efficiency  and  the 
improvements  of  nature.  Part  of  it  is  then  transferred  to  a  rent 
fund  by  the  increase  of  local  and  personal  advantage.  Another  part 
as  undivided  profits  becomes  capital,  the  return  on  which  is  interest. 
The  part  used  socially  by  the  state  and  absorbed  in  its  expenses  is 
taxation.  The  part  secured  by  workmen  through  organization  or 
local  advantage  is  the  super-wage.  The  residual  or  pure  profits 
is  the  share  of  centralized  industry.  In  addition  to  this  surplus 
there  is  a  subsistence  fund  for  the  toilers  which  may  be  inadequate 


46  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

for  their  conservation  and  in  proportion  to  their  numbers  tend<  to 
decrease. 

Such  statements  differ  from  those  of  the  wage-fund  theorists. 
They  differ  not  less  in  the  action  called  for  than  in  the  theory  itself. 
The  one  view  demands  activity  of  the  workers  in  securing  their  rights ; 
the  other  gives  them  an  income  fixed  by  natural  law.  It  seems 
simpler  and  less  troublesome  to  have  the  laborers  penned  within 
bounds  and  to  have  their  income  handed  out  to  them  by  fixed  eco- 
nomic laws.  In  reality,  however,  the  difficulties  are  thereby  increased. 
The  laborers  will  act  in  any  case  and  if  industrial  relief  is  denied  them 
whether  by  nature  or  man  they  will  resort  to  political  action  to 
enforce  their  demands.  The  choice  is  really  between  a  political  social- 
ism that  would  absorb  all  profits  and  such  direct  action  on  the  part 
of  laborers  as  will  insure  them  a  share  in  the  social  surplus.  In 
the  one  case  they  act  unitedly  and  are  interested  in  the  overthrow  of 
existing  institutions.  In  the  other  case  they  act  as  an  industrial 
group  and  force  such  changes  in  prices  as  will  permit  of  increased 
wages. 

Every  change  in  wages  forces  readjustments  in  values  favorable 
to  the  industry  in  which  it  is  made.  The  burden  falls  on  the  super- 
profits of  new  industries  if  profits  are  increasing  more  rapidly  than 
wages.  If,  however,  wages  rise  more  rapidly  than  profits,  family 
budgets  are  burdened  by  the  excess,  and  a  recomposition  of  budgetary 
values  ensues.  In  this  change  the  working  capitalists  are  protected 
by  their  increasing  personal  efficiency.  The  budgetary  losses  thus 
fall  mainly  on  those  with  fixed  incomes ;  this  means  that  it  falls  largely 
on  inherited  wealth.  Practically,  therefore,  it  may  be  said  that  high 
wages  are  a  burden  on  centralized  wealth  enjoying  super-profits, 
or  on  inherited  wealth  in  the  form  of  fixed  income.  These  classes 
have  no  way  to  recoup  their  losses.  High  wages  thus  result  in  a 
redistribution  of  wealth  to  a  greater  degree  than  in  a  redistribution 
of  income.  The  working  elements  of  society  gain  at  the  expense  of 
the  leisure  class.  Socially  this  is  advantageous  even  if  it  is  wrought 
with  much  individual  suffering.  It  is  better  to  have  economic  law 
distribute  income  through  group  pressure  on  prices  than  to  have  the 
whole  social  organization  upturned  in  a  class  struggle  for  social  control. 


IX.     PRACTICAL  APPLICATIONS  OF  THE  THEORY  OF  DISTRIBUTION 

Two  important  facts  have  been  brought  out:  a  large  social 
surplus  exists;  its  distribution  is  not  determined  by  natural  law. 
Less  than  a  third  of  the  income  of  the  people  of  the  United  States 
has  its  distribution  fixed  by  natural  conditions.  The  rest  of  it  is 
distributed  by  social  laws.  This  statement  will  not  be  readily  ac- 
cepted for  two  reasons.  Many  economists  attached  to  the  doc- 
trines of  natural  law,  dislike  to  see  the  old  viewpoint  disturbed. 
Another  type  of  opposition  is  of  more  practical  importance.  I 
shall  state  it  in  the  words  of  a  reformer  to  whom  I  recently  pre- 
sented my  view.  His  comment  was  that  if  my  argument  could  not 
be  refuted  the  result  would  be  confusing.  He  admitted  that  if  a  man 
inherits  ability  and  from  it  gets  an  income  of  five  thousand  dollars 
a  year,  his  income  is  no  more  earned  than  if  he  inherited  a  corner 
lot.  But  the  older  viewpoint  gave  a  decision  as  to  how  to  increase 
public  revenues.  All  this  is  thrown  into  confusion  by  any  indefinite- 
ness  in  the  statement  of  natural  law.  One  can  no  longer  say,  "Fix 
the  rent  of  each  farm  or  city  lot  and  take  as  much  as  is  needed  for 
public  purposes."  This  apparent  confusion  I  admit,  but  I  do  not 
believe  it  indicates  any  ultimate  confusion.  The  difference  between 
the  older  and  newer  view  can  be  put  in  this  way.  The  earlier 
economists  said  that  economics  treats  of  the  production  and  distri- 
bution of  wealth.  If  economics  is  divided  into  two  departments, 
the  theory  of  distribution  is  the  end  of  economic  theory;  and  in  it 
a  decision  must  be  made  as  to  how  income  should  be  distributed. 
This  view  was  simple  and  clear  so  long  as  production  and  distribu- 
tion were  thought  to  be  determined  by  natural  law.  As  soon,  how- 
ever, as  it  is  realized  that  distribution  is  not  determined  by  natural 
law,  it  must  be  replaced  by  views  based  on  other  principles. 

A  new  definition  of  economics  should  run  like  this:  economics 
treats  of  the  production,  distribution,  control  and  consumption  of 
wealth.  After  the  theory  of  distribution  is  explained,  theories  of 
wealth  control  and  of  wealth  consumption  should  be  discussed.  It 
is  not,  therefore,  an  objection  to  a  theory  of  distribution  that  it  does 
not  settle  the  distribution  of  wealth  if  it  is  followed  by  other  theories 
the  joint  effect  of  which  is  to  give  the  needed  decision.  This  position 
does  not  differ  materially  from  that  of  Mill.  He  affirms  the  reality 

(47) 


48  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

of  social  control  and  the  importance  of  the  consumption  of  wealth. 
He,  however,  regarded  the  generation  of  public  opinion  as  not  being 
within  the  range  of  economic  theory.  He  says  that  human  opinions 
"are  a  part  of  the  general  theory  of  human  progress,  a  far  larger  and 
more  difficult  subject  of  inquiry  than  political  economy."  This 
was  a  good  statement  of  economic  theory  in  1848,  but  it  is  not 
correspondingly  true  at  the  present  time.  The  theory  of  social  con- 
trol is  now  well  developed  and  economists  can  with  confidence  enter 
a  field  that  Mill  of  necessity  avoided.  Another  change  must  also 
be  made  to  bring  Mill's  statement  down  to  date.  Speaking  of  the 
laws  of  the  distribution  of  wealth,  he  says  that  they  are  a  matter 
of  human  institution  solely.  "Mankind  can  do  what  they  like 
with  what  they  have  produced  and  place  it  at  the  disposition  of 
whomever  they  will  on  whatever  terms  they  please."  This  is  an 
over-statement.  It  is  not  true  that  public  opinion  has  any  such 
control  over  the  distribution  of  wealth;  it  is  true,  however,  that 
there  are  options  in  the  distribution  of  wealth,  and  these  options  are 
of  importance  in  economic  decisions. 

Three  supplementary  theories  must  be  discussed  before  the 
distribution  of  wealth  becomes  definite.  There  must  be  a  law  of 
prices,  a  law  of  progress  and  a  law  of  social  control.  In  each  of  these 
fields  are  opposing  theories,  one  of  which  must  in.  the  end  be  accepted. 
As  to  prices,  there  is  the  theory  of  cheapness  and  plenty  formulated 
by  Adam  Smith  which  makes  the  criterion  of  progress  the  reduction 
of  prices.  Opposed  to  this  is  the  theory  that  prices  cannot  as  a 
whole  be  raised  or  lowered  but  are  altered  to  the  advantage  or  dis- 
advantage of  particular  groups.  In  the  field  of  social  progress 
utilitarian  doctrines  set  up  as  a  measure  of  progress  the  sum  and 
distribution  of  happiness.  Opposed  to  them  is  the  evolutionary 
concept  which  assumes  that  progress  is  measured  not  in  happiness 
but  in  the  growth  of  new  types  and  in  altered  social  relations.  Of 
social  control  there  are  five  kinds.  The  oldest  type  is  ancestral 
control  which  at  present  is  mainly  exerted  through  the  church  and 
the  courts.  A  second  type  is  wealth  control  best  seen  in  leisure  class 
privileges.  A  third  is  group  control,  by  which  I  mean  the  organiza- 
tion of  industrial  groups  so  that  they  can  alter  the  prices  of  the 
commodities  they  make.  Industrial  groups  that  can  raise  prices 
grow  strong  and  survive;  those  that  cannot  fail  and  break  up. 
A  fourth  type  of  control  is  family  control.  That  kind  of  a  family 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  49 

perpetuates  itself  that  intensifies  the  enjoyment  of  the  goods  its 
income  permits  it  to  buy.  Intensive  family  life,  therefore,  is  measure 
of  family  control.  The  fifth  type  of  control  is  coercive  state  action. 

It  is  not  likely  that  either  ancestral  control  or  wealth  control 
will  dominate  in  the  future.  The  church  and  the  courts  have  less 
influence;  the  leisure  class  is  losing  its  power.  Group  control,  how- 
ever, and  family  control  are  growing  and  are  in  reality  two  sides  of 
one  problem.  The  group  is  the  unit  by  which  producers  unite  for 
the  purpose  of  increasing  prices.  The  family  is  the  unit  in  which 
the  same  people  unite  to  intensify  their  consumption.  The  two 
together  make  voluntary  control,  which  is  to  be  set  over  against 
the  coercive  state  control.  The  real  choice  of  the  American  people 
lies  between  voluntary  control  and  coercive  state  control.  I  shall 
not  attempt  to  describe  state  control  because  this  is  already  familiar 
to  the  public,  but  how  voluntary  control  would  operate  needs  descrip- 
tion and  its  laws  need  enunciation.  The  central  point  of  voluntary 
control  is  the  budgetary  concepts  of  the  families  that  participate 
in  it.  This  means  that  discussion  must  be  shifted  from  distribution 
to  family  budgets  and  to  this  field  I  shall  turn  in  the  following 
sections. 

Before  doing  so,  however,  it  is  necessary  to  point  out  the  place 
where  these  doctrines  will  be  brought  to  the  test.  From  time  to 
time  commissions  are  appointed  to  determine  the  right  of  laborers 
to  an  advance  in  wages.  These  commissions  must  have  a  theory 
of  prices,  a  theory  of  progress,  a  theory  of  social  control,  and  they 
also  must  make  decisions  in  regard  to  the  centralization  of  industry. 
One  way  of  showing  the  practical  application  of  these  theories,  is 
to  state  the  views  held  by  the  Interstate  Commerce  Commission. 
In  discussing  the  right  of  the  railroad  employees  to  a  higher  rate  of 
wages,  one  of  them  is  reported  to  have  said  that  no  rise  in  railroad 
rates  would  be  permitted  to  meet  such  an  increase  in  expenses,  and 
if  a  change  in  wages  were  made,  it  should  begin  with  the  lower 
classes"  of  laborers  rather  than  with  the  higher.  A  third  doctrine 
should  be  added  to  these  in  order  clearly  to  understand  what  issues 
ere  in  such  decisions — the  doctrine  that  low  freight  rates  are  nation- 
ally advantageous.  Before  it  can  be  determined  whether  or  not 
railroad  rates  should  be  increased  to  allow  an  increase  in  the  wages 
of  employees,  it  must  be  decided  whether  high  prices  or  low  prices 
are  socially  advantageous.  This  decision  is  a  part  of  the  theory  of 


50  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

prices  and  not  of  distribution.  The  second  proposition  comes 
under  the  theory  of  progress.  It  is  a  question  of  evolution  as  against 
utilitarianism  to  decide  whether  the  wages  of  poorly  paid  employees 
should  be  raised  before  those  of  the  better  paid  workmen.  If  we 
were  attempting  to  improve  a  breed  of  animals,  we  would  not  begin 
by  trying  to  improve  the  poorer  stock.  Do  animal  progress  and 
human  progress  have  different  laws?  Low  freight  rates  favor  the 
centralization  of  industry,  while  high  freight  rates  tend  to  localize 
industry.  There  is  the  same  problem  internally  in  regard  to  freight 
rates  as  externally  existed  in  regard  to  the  tariff.  The  theory  of 
industrial  centralization  is  not  a  part  of  the  theory  of  distribution 
and  yet  some  decision  about  it  must  be  made  before  theories  of  dis- 
tribution have  a  practical  value.  These  theories  demand  conscious 
attention.  When  they  are  decided  the  theory  of  distribution  is 
definite  and  of  great  practical  importance. 


X.     BUDGET  MAKING 

In  current  theories  of  distribution  two  radically  different  forms 
of  society  are  confused.  By  trying  to  blend  them  into  one  social 
concept  economists  have  set  for  themselves  an  impossible  task  and 
thus  paved  the  way  for  the  failure  of  their  theories.  They  have 
assumed  that  the  national  dividend  was  divided  into  definite  funds 
from  each  of  which  a  distinct  class  obtained  its  income.  There 
are  funds  but  they  are  not  all  derived  from  the  same  social  structure, 
and  hence  they  cannot  be  added  together  to  make  one  national 
dividend.  Rent  and  profits  are  integral  parts  of  a  pleasure  econ- 
omy and  become  recognized  only  in  a  highly  specialized  society. 
A  subsistence  fund  belongs  to  a  primitive  pain  economy.  Wages 
are  a  definite  fund  only  when  they  are  the  equivalent  of  the  toil 
of  production  or  of  the  subsistence  fund  needed  to  perpetuate  the 
working  population.  When  values  are  due  solely  to  work,  rent 
and  profits  represent  the  exploitation  of  labor.  On  the  other  hand 
if  the  growth  of  rent  and  profit  indicates  progress  the  wage  fund 
represents  the  still  unsurmounted  obstacles  standing  in  its  way. 
Theoretically  an  advanced  society  should  have  no  wage  fund,  nor 
on  like  grounds  should  a  primitive  society  have  a  rent  or  profit  fund. 

Economists  however  have  seized  neither  of  these  bold  concepts 
but  have  tried  to  compromise  between  them  by  assuming  that  the 
laborers  are  in  a  pain  economy  struggling  for  subsistence,  while 
the  capitalists  are  in  a  pleasure  economy,  enjoying  rent  and  profits. 
This  compromise  creating  a  national  dividend  composed  of  three 
definite  funds  may  have  fitted  the  conditions  of  England  in  a  par- 
ticular stage  of  its  progress,  but  it  cannot  be  accepted  as  a  general 
law.  Every  new  adjustment  shifts  the  relations  between  profits 
and  the  income  of  the  toilers.  If  the  surplus  grows,  the  toilers  are 
driven  into  narrower  fields:  if  it  falls  off,  profits  shrink  and  the 
subsistence  fund  becomes  relatively  more  important.  Between 
them  however  there  are  no  definite  relations  such  as  would  create 
fixed  funds  each  with  its  own  laws.  There  is  no  equilibrium 
between  struggling  classes.  The  weak  do  not  divide  with  the  strong : 
they  are  either  destroyed  or  driven  from  the  field. 

If  income  is  not  divided  into  funds  some  other  viewpoint  must 
be  adopted  to  discover  how  income  is  distributed  between  strug- 

(51) 


52  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

gling  groups.  Socially  the  equilibrium  must  be  looked  for  not  in  a 
series  of  funds  but  in  a  series  of  budgets,  each  of  which  represents  the 
forces  acting  on  a  given  class.  In  each  budget  there  is  a  recomposi- 
tion  of  values  so  as  to  force  an  equilibrium  between  receipts  and 
expenditures.  To  add  to  costs  in  one  particular,  forces  reductions  in 
costs  in  other  quarters.  To  reduce  costs  likewise  alters  the  value  of 
other  items.  A  change  in  one  estimate  forces  changes  in  every  value 
relation.  This  doctrine  has  often  been  stated  in  the  abstract  but 
no  application  has  been  made  of  it  in  distribution.  A  budget  is 
another  name  for  the  value  estimates  which  each  man  or  group  of 
men  make  when  at  stated  intervals  they  round  up  their  relations  to 
other  men  or  groups. 

Budgets  are  social  estimates.  No  man  forms  an  equilibrium 
by  himself.  He  is  a  part  of  some  family  thus  modifying  his  esti- 
mates of  expenditures,  or  he  is  a  member  of  some  cooperative  group 
of  producers  and  thus  acquires  social  estimates  of  costs.  Usually 
both  cost  and  expense  estimates  are  social  and  hence  on  both  sides 
of  the  ledger  there  is  a  recomposition  of  values.  Each  item  gets  its 
value  by  a  process  of  social  imputation  and  not  from  direct  estimates 
of  the  pleasures  and  pains  involved.  Pleasure  and  pain  disappear 
as  psychic  quantities  and  reappear  as  social  estimates  of  cost  and 
value.  Pain  is  socially  thought  of  as  expense  and  pleasure  as  value. 
Every  budget  thus  equates  at  some  equilibrium  and  thus  gives  a 
social  measure  of  group  standing.  This  shift  from  natural  standards 
to  social  standards  furnishes  the  economic  measure  of  progress. 
Primitive  men  have  more  or  less  as  nature's  abundance  alters  in 
amount.  The  budget  maker  rounds  out  his  relations  to  nature  in 
such  a  way  that  he  has  an  equilibrium  independent  of  nature's 
variations.  These  budgetary  forces  are  the  active  agents  in  dis- 
tribution; as  they  increase  or  are  modified  the  national  income  is 
forced  this  way  or  that.  A  nation  thus  has  a  group  of  budgets  each 
with  its  own  forces,  but  not  a  group  of  funds  each  with  its  own  laws. 

There  is  a  budgetary  assumption  back  of  current  thought 
although  the  method  of  expression  hides  its  real  character.  The 
trade  of  two  nations  equates  itself  in  a  budgetary  balance  brought 
about  by  a  recomposition  of  values  in  each  nation  so  as  to  bring 
trade  to  an  equilibrium.  This  national  budget  and  its  influence  on 
values  are  well  understood.  It  is  also  recognized  that  each  class  has 
a  budget  in  which  there  is  a  similar  recomposition  of  values  to  that 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  53 

taking  place  in  international  trade.  This  is  the  theory  of  non-com- 
peting groups.  It  is,  however,  not  so  clearly  seen  .that  each  business 
enterprise  has  a  budget  in  which  a  similar  recomposition  of  values 
takes  place.  Does  a  business  firm  merely  add  up  costs  and  sell  at 
a  given  profit,  or  does  every  change  in  costs  force  other  changes 
both  in  costs  and  values  so  that  a  budgetary  equilibrium  is  pre- 
served? Another  way  of  putting  the  problem  is  to  ask  whether, 
with  each  addition  to  the  costs  of  single  items,  the  value  of  the  final 
product  can  be  correspondingly  increased,  or  must  this  growing  cost 
in  one  respect  be  met  by  increasing  economies  in  other  items  ?  What 
power,  in  other  words,  have  business  men  to  increase  prices  when 
costs  increase  and  what  likelihood  is  there  of  a  fall  in  price  if  costs 
are  reduced? 

The  answer  to  these  questions  depends  on  whether  the  business 
man  is  looked  on  as  a  bookkeeper  who  gives  his  statistics  to  the 
public  in  price  tables  or  whether  each  business  group  is  a  unit 
with  a  budget  in  which  a  recomposition  of  values  is  worked  out. 
The  answer  has  been  given  by  economists  but  their  reasoning  has 
not  been  generally  accepted.  In  fact  two  theories  have  been  pre- 
sented each  with  its  advocates.  Adam  Smith  said  that  values  were 
the  sum  of  costs  and  that  they  increased  or  decreased  as  costs  rose 
or  fell.  This  popular  view  has  its  best  expression  in  free  trade 
doctrines.  Ricardo  however  contended  that  the  increase  of  costs 
does  not  increase  values:  it  lowers  profits.  The  Ricardians  were 
quite  willing  that  trade  should  concentrate  in  England  but  they 
were  not  willing  to  say  that  the  benefits  of  this  trade  were  wholly 
English.  They  did,  however,  say  that  all  the  benefits  -of  English 
industry  went  to  the  capitalists  as  profits,  and  that  the  laborers 
were  paid  from  a  fixed  fund  that  had  no  direct  relation  to  the  pro- 
ductivity of  English  industry.  In  which  were  the  English  econo- 
mists right; — in  their  assumption  that  the  laborers  did  not  share  in 
the  benefits  of  increased  production  or  that  foreigners  who  traded 
with  England  did?  It  is  plain  that  they  used  the  theory  of  Adam 
Smith  in  the  one  case  while  they  used  the  Ricardian  theory  in  the 
other.  It  is  also  plain  that  the  Ricardian  theory  is  a  budgetary 
concept  involving  a  recomposition  of  values.  Capitalism  is  industry 
organized  for  profit.  A  producer  becomes  a  capitalist  as  soon  as 
he  keeps  his  accounts  so  that  profits  and  costs  become  distinct. 
His  viewpoint  now  shifts  so  that  he  measures  every  act  by  the  way 


54  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

it  affects  his  profits.  There  is  a  revision  of  his  estimates,  so  that 
costs  figure  as  pains  and  values  as  pleasures.  He  thus  creates  a 
social  viewpoint  that  distinguishes  'him  from  the  primitive  worker. 

In  a  primitive  society  the  wealthy  class  are  not  budget  makers. 
The  limit  to  their  expenditure  is  the  varying  annual  produce  of 
their  land  which  is  easily  overrun  in  any  nation  where  there  is  a 
money-lending  class.  The  rest  of  the  community  is  divided  into 
traders  who  scheme  and  the  toilers  who  suffer  from  exploitation. 
Primitive  traders  are  notoriously  unscrupulous.  They  prey  on  one 
another  as  well  as  on  the  community.  It  is  from  their  cut-throat 
methods  that  the  theory  of  competition  arose.  When  traders  are 
transformed  into  producers  each  sale  ceases  to  be  an  individual  unit 
brought  about  by  the  higgling  of  the  market.  It  becomes  an  item 
in  a  ledger  showing  not  the  high  profit  on  individual  sales  but  the 
average  profit  on  many  sales.  The  merchant  deals  with  a  group 
and  his  methods  must  become  social  to  succeed.  No  one  can  become 
a  statistician  without  socializing  himself.  The  trader  is  thus  brought 
into  harmony  not  only  with  his  community  but  also  with  his  fellow 
dealers.  Competition  is  in  harmony  with  high  return  on  single 
sales :  it  is  not  in  harmony  with  high  average  profits.  No  one  keeps 
an  accurate  ledger  of  receipts  and  expenditures  without  finding  that 
his  average  profit  is  lowered  by  price  cutting.  He  may  thus  dispose 
of  otherwise  unsalable  goods  or  gain  by  some  uncontrollable  exi- 
gency of  the  market  but  his  average  profit  will  fall  off.  Budget- 
makers  deal  fairly  with  consumers  and  cooperate  with  fellow  pro- 
ducers. Square  dealing  and  cooperative  methods  are  the  only  means 
of  raising  the  rate  of  profit. 

Competition  is  not  a  human  trait  but  an  unsocial  tendency. 
It  fails  in  large  scale  production  because  this  is  the  first  to  be  social- 
ized. Large  producers  keep  accurate  books  and  know  the  cost  of 
competition.  They  are  the  first  to  place  high  average  profit  in  the 
place  of  high  profit  on  single  sales.  Gradually,  however,  the  small 
producers  are  becoming  budget-makers  and  as  they  do  their  action 
differs  from  large  producers  only  in  being  more  social  and  hence 
more  coercive  in  their  demands  that  all  members  of  their  group  live 
up  to  the  standards  of  the  trade.  High  social  morality  and  high 
average  profits  have  the  same  roots  because  they  are  both  the  results 
of  the  socializing  influence  of  budget-making. 

The  theory  just  stated  gets  a  practical  bearing  when  it  is  asked : 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  55 

Does  prosperity  raise  wages  and  lower  prices  or  does  it  raise  profits? 
If  competition  is  social  and  group  unity  unsocial,  the  increase  of 
prosperity  should  lower  prices  and  raise  wages.  The  gains  of  social 
progress  would  thus  diffuse  themselves  among  consumers  and  work- 
men. If,  however,  group  unity  is  the  effect  of  accurate  budget- 
making,  the  pressure  of  economic  progress  will  favor  socialized  pro- 
ducers at  the  expense  of  family  budgets.  Profits  grow  by  the  failure 
of  prices  to  fall  when  the  expenses  of  production  are  reduced.  High 
rents  result  from  a  rise  in  prices.  When  prices  are  rising  rents  are 
growing;  when  profits  rise  costs  are  decreasing  without  a  corre- 
sponding decrease  in  prices.  There  is  thus  a  decisive  test  as  to 
whether  the  consumer  is  injured  by  the  rise  of  rents  or  of  profits. 
When  he  fails  to  secure  benefit  from  improved  production  profits 
have  risen.  When  he  pays  more  for  goods  rents  are  on  the  increase. 
Higher  prices  show  that  the  national  income  is  being  transferred 
from  profits  to  the  rent  and  also  that  localized  differential  advantage 
is  growing  at  the  expense  of  centralized  wealth.  Rent  is  either  a 
return  for  local  advantage,  for  favorable  positions,  or  for  special 
ability.  What  a  man  gets  for  his  individual  powers,  whether  due 
to  education  or  inheritance,  is  rent  as  truly  as  the  income  from  a 
corner  lot  or  a  mine.  Industries,  therefore,  are  centralized,  in  which 
case  their  return  remains  profits,  or  they  are  localized,  in  which 
case  their  return  is  mainly  rent.  Profit  and  rent  represent  two 
opposing  tendencies,  and  from  the  opposition  thus  developed  comes 
the  acutest  problem  of  modern  civilization. 

Budget-making  is  the  force  uniting  men  into  groups  and  blend- 
ing smaller  groups  into  larger  ones.  It  makes  a  social  group  out  of 
all  who  keep  their  budgets  in  the  same  way,  and  creates  an  economic 
morality  that  prevents  the  aggressions  of  individuals  from  injuring 
members  of  the  group.  Of  these  budget-makers  there  are  several 
varieties,  or  perhaps  it  is  better  to  say  budget-making  has  gone 
through  several  stages  of  development.  The  first  type  of  budget 
might  be  called  a  nature  budget  because  the  contrast  is  between 
what  man  does  in  production  and  what  nature  does  for  him.  The 
surplus  is  then  the  aid  nature  gives.  These  estimates  are  true  of  an 
isolated  man  gaining  advantage  over  a  reluctant  nature.  They  are 
defective  in  that  they  overlook  the  effects  of  invention  and  neglect 
class  antagonism.  The  second  type  of  budget  is  the  national  budget 
so  much  emphasized  by  protectionists.  While  apparently  national 


56  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

it  is  in  reality  a  class  viewpoint,  because  tariff  schedules  are  made 
by  manufacturers  and  reflect  their  interest.  A  third  budget  is  that 
of  the  centralized  industries.  Wealth  not  welfare  gains  recognition. 
All  progress  thus  seems  bound  up  with  and  measured  by  the  growth 
of  capital.  From  such  industries  there  is  no  hope  of  lower  prices, 
but  at  the  time  there  is  little  danger  of  a  rise.  The  fourth  type 
of  budget  is  that  of  the  working  capitalist.  Here  the  estimates 
are  in  terms  of  work.  Capital  is  an  adjunct  of  work  but  not  an 
independent  agent.  The  farmer  says  he  has  done  a  day's  work 
when  he  has  plowed  eight  acres  of  corn  because  he  thinks  of  himself 
as  the  active  agent  in  the  process.  He  says  he  raised  eight  hundred 
bushels  of  wheat,  not  that  his  farm  produced  it.  A  physician  also 
says  that  he  cured  the  patient,  not  that  his  acquired  skill  did  it. 
All  professional  men  think  in  terms  of  work  and  overlook  the  capital 
involved  in  their  education.  They  have  no  budget  showing  profit; 
it  shows  only  day's  work  and  annual  income.  Profit  and  work  are 
thus  symbols  of  opposing  budgetary  ideas,  and  the  two  views  seem 
to  clash  where  there  is  in  reality  a  fundamental  unity.  To  think 
in  terms  either  of  capital  or  activity  shows  defective  budgetary 
concepts  which  the  future  development  of  budgetary  relations  will 
remove.  There  is  a  unity  even  if  as  yet  it  is  unseen.  All  budgets 
would  harmonize  and  blend  if  they  were  complete  enough  to  show 
the  needed  facts. 


XI.     FAMILY  BUDGETS 

The  fundamental  change  separating  industrial  nations  from  their 
primitive  predecessors  is  the  rise  of  budgetary  concepts  and  the 
resulting  recomposition  of  economic  and  social  values.  Modern 
calculation  forces  readjustments  through  which  primitive  emotions 
are  decomposed  and  reorganized  in  more  effective  ways.  Emotional 
outbursts  are  thus  suppressed  or  turned  into  useful  channels.  The 
first  of  these  budgets  was  the  nature  budget  that  traces  the  source 
of  welfare  either  to  the  favorable  action  of  nature  or  to  the  work 
of  men.  The  second  was  the  national  budget  made  prominent  by 
the  mercantile  economists.  The  commercial  budget  came  next  in 
which  the  emphasis  of  profits  and  costs  became  prominent.  The 
budget  of  the  working  capitalist  is  the  most  recent  addition  to  this 
series.  It  is  harder  to  name  this  type  of  budget  because  it  appears 
in  many  forms  each  of  which  is  too  specific  to  be  generally  applicable. 
The  product  which  the  worker  with  machines  imputes  to  himself 
is  largely  the  product  of  the  machine  he  uses.  So  too  the  farmer's 
product  is  largely  that  of  land,  the  small  dealer's  product  is  partly 
that  of  his  location,  while  the  product  of  the  professional  man  is 
mainly  that  of  acquired  skill  due  to  capital  sunk  in  his  education. 
In  each  of  these  cases  there  is  a  joint  product  of  rent,  capital  and 
energy  imputed  to  the  active  agent  as  work.  This  is  a  recomposi- 
tion of  values  which  brings  a  social  reconstruction  in  harmony  with 
budgetary  needs.  Call  this  class  what  you  may,  it  is  the  largest 
and  strongest  class  in  modern  societies  and  by  its  action  the  progress 
of  the  future  will  be  shaped. 

The  growth  of  budgetary  concepts  does  not  cease  with  these 
developments.  There  are  other  types  of  budget  forming  of  which 
the  municipal  budget  is  the  most  easily  recognized.  But  of  more 
importance,  although  thus  far  more  indefinite,  is  the  family  budget 
now  so  forceful  in  shaping  social  estimates. 

Personal  development  is  said  to  be  a  recapitulation  of  the  history 
of  the  race.  The  child  starts  early  in  his  emotional  life  and  becomes 
rational  as  he  suppresses  emotional  estimates  and  puts  in  their  place 
values  formed  by  the  budgetary  group  of  which  he  is  a  part.  The 
word  "family"  has  two  meanings.  We  think  of  it  as  an  emotional 
group  whose  ties  are  sexual  or  we  think  of  it  as  a  budgetary  group 

(57) 


58  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

held  together  by  common  work  and  life  interests.  The  first  sort  of  a 
family  has  no  budget.  Its  morality  consists  of  emotional  checks 
voiced  by  tradition.  Family  budgets  represent  the  change  that 
comes  over  families  as  they  rise  in  efficiency,  and  are  thus  capable 
of  putting  into  effect  economic  checks  to  the  evils  from  which  they 
suffer. 

The  first  effect  of  improved  production  is  to  raise  profits.  What 
are  the  forces  that  take  revenue  from  this  fund  and  transform  it  into 
wages  or  into  cheap  commodities  ?  Protectionists  reply  that  national 
prosperity  brings  high  wages,  and  thus  adds  to  the  family  income. 
Free  traders,  on  the  contrary,  argue  that  their  policy  reduces  costs, 
and  thus  aids  families  on  the  expense  side.  These  two  seemingly  differ- 
ent policies  are  rooted  in  the  same  economic  doctrines.  Prosperity 
lowers  costs,  and  thus  permits  a  higher  wage  rate,  says  the  one; 
prosperity  lowers  costs,  and  thus  reduces  family  expenses,  says  the 
other.  A  third  possibility  that  prosperity,  by  lowering  costs,  raises 
profits  is  overlooked  by  both  disputants.  Which  then  is  good  eco- 
nomics: prosperity  raises  wages;  prosperity  lowers  prices;  or  pros- 
perity raises  profits  ?  To  answer  this  question  the  nature  of  indus- 
trial changes  must  be  explained.  Improvements  of  the  nineteenth 
century  have  been  especially  prominent  in  iron  and  steel  production. 
A  second  group  of  changes  show  themselves  in  a  lowered  cost  of  trans- 
portation; a  third  in  agricultural  machinery.  These  improvements 
affect  the  family  budget  only  indirectly,  either  in  the  price  of  houses 
or  of  food.  The  real  cost  of  producing  food  has  fallen,  but  instead 
of  lower  food  prices  there  has  been  a  rising  price  of  agricultural 
land.  The  burden  of  higher  prices  is  on  raw  materials,  farm  build- 
ings, fences  and  machinery,  and  building  material  in  city  homes. 
None  of  these  items  enters  into  family  budgets.  Between  producer 
and  consumer,  in  all  these  cases,  there  is  a  landlord  to  whose  benefit 
the  lower  costs  accrue.  Family  budgets  do  not,  therefore,  show  the 
improvement  that  industrial  changes  would  warrant.  Rising 
profits  check  the  growth  of  wages;  rising  rents  absorb  the  gains  of 
industrial  efficiency.  Family  budgets  face  a  deficit  where,  if  the 
relations  between  costs  and  expenses  were  direct,  there  would  be  a 
surplus. 

There  are  articles,  however,  to  which  the  consumers'  relations 
are  still  direct.  Of  these,  sugar,  wool  and  silk  are  important.  To 
families  with  an  income  above  $1,000  a  year,  they  form  a  burden  of 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  59 

say  five  per  cent  of  income.  The  same  families  are  paying  twenty 
per  cent  of  income  as  rent.  Let  me  illustrate  in  my  own  case.  I 
buy  three  suits  a  year,  on  which  the  tariff  duties  are  ten  dollars 
each.  For  room  rent  I  pay  four  times  as  much  as  for  clothes.  It 
costs  me  two  dollars  a  day  for  food,  of  which  one-fourth  is  rent  in  some 
of  its  various  forms.  My  tariff  duties  are  not  more  than  fifty  dollars 
a  year,  while  my  payments  for  rent  exceed  $800  a  year.  This  is  a 
fair  sample  of  incomes  above  $2,000  a  year.  It  is  rent,  not  the  tariff, 
that  makes  the  burden  under  which  the  workers  groan.  What  the 
landlords,  city  and  country,  obtain  is  that  part  of  the  gains  of  con- 
centrated industry  which  the  trusts,  railroads  and  the  protected 
industries  have  not  been  able  to  hold.  There  is  a  real  opposition  of 
interest  between  the  centralized  industries,  whose  gains  are  profits, 
and  the  localized  industries  where  income  is  mainly  rent.  It  is 
possible  to  aid  Illinois  farmers  at  the  expense  of  Pittsburgh  profits, 
or  New  York  landlords  at  the  expense  of  those  of  smaller  towns. 
Neither  group,  however,  has  any  right  to  claim  they  represent  the 
people.  To  transfer  dollars  from  New  York  to  Wisconsin  is  no  more 
to  the  public  interest  than  a  movement  in  the  other  direction.  The 
family  budget  is  not  improved  by  going  from  city  to  country,  or  from 
Iowa  to  Texas.  Local  advantage  is  absorbed  in  land  values.  To 
move  is  merely  to  change  landlords.  To  vote  another  ticket  may  help 
this  politician  or  that,  but  it  will  not  remove  the  deficit  from  the 
family  budget. 

The  annual  produce  of  a  nation  is  thus  distinct  from  the  sum  of 
family  budgets.  The  total  income  of  families  equals  the  total  output 
of  personal  energy,  but  the  annual  produce  that  results  far  exceeds 
the  sum  entered  on  the  expense  side  of  the  family  ledger.  All  that 
goes  to  replace  capital  or  to  increase  capital  forms  no  part  of  family 
budgets.  If  the  annual  surplus  of  a  nation  were  used  to  increase 
capital,  a  steady  growth  in  the  number  of  families  would  result, 
but  no  change  in  the  average  family  budget.  Such  a  nation  would 
be  called  prosperous  and  trade  statistics  would  prove  the  contention. 
It  would,  however,  be  a  national  not  a  family  prosperity.  Some  other 
change  than  mere  growth  must  take  place  to  alter  budgetary 
relations. 

We  get  an  explanation  of  budgetary  improvement  by  contrasting 
personal  income  with  vested  income.  Personal  income  comes  from 
productive  acts  which  cease  when  the  producer  dies  or  is  disabled. 


60  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

Vested  income  is  impersonal  and  is  enjoyed  by  some  one  so  long 
as  production  is  unaltered.  All  profit  and  rent  are  vested  income. 
The  share  that  goes  to  them  is  capitalized  and  remains  a  fixed  charge 
on  industry.  Family  income  increases  as  personal  income  grows. 
It  is  not  altered  by  what  increases  vested  income.  The  sum  of 
profits  and  rent  is  thus  outside  of  the  influences  affecting  family 
budgets.  There  is  a  well-known  economic  law  which  says  profits 
fall  as  wages  rise  and  rise  as  wages  fall.  The  newer  expression 
of  this  law  is  that  the  sum  of  family  budgets  increases  in  amount  as 
vested  income  falls  off,  and  is  reduced  as  vested  income  grows.  What- 
ever reduces  the  price  of  articles  composing  the  fund  replacing  capital 
benefits  vested  income  by  the  resulting  rise  in  profits  and  rent. 
If  industrial  improvements  reduce  the  cost  of  articles  in  the  replace- 
ment fund  and  not  those  entering  family  budgets  they  will  increase 
vested  income  without  any  necessary  alteration  of  family  welfare. 
There  is  a  gap  between  national  prosperity  and  improved  family 
life  that  must  be  filled  in  some  other  way. 

Higher  values  for  personal  services  do  not  seem  to  relieve  the 
situation  because  the  change  merely  raises  prices  and  does  not  alter 
price  relations.  This  objection  would  hold  if  all  personal  services 
were  used  to  produce  consumers'  goods.  Much  of  them,  however,  is 
employed  to  replace  capital.  In  so  far  as  the  higher  prices  of  services 
increase  the  value  of  the  replacement  fund,  the  burden  of  the  change 
falls  on  vested  income  and  not  on  family  budgets.  All  of  the  increased 
value  of  personal  services  goes  to  improve  the  monetary  side  of 
family  budgets  while  only  a  part  of  the  increased  cost  falls  on 
the  expense  side.  Roughly  speaking,  two-thirds  of  the  laborers  are 
used  either  to  increase  capital  or  to  make  non-consumable  goods. 
The  major  part  of  the  growing  cost  of  personal  services  thus  falls 
on  vested  income.  Consumable  goods  rise  in  price  but  the  capitalized 
value  of  investments  falls  off  because  of  the  decrease  of  vested  income. 
There  is,  therefore,  a  way  in  which  budgetary  values  can  react  on  the 
industrial  situation.  Is  there  a  practical  way  in  which  it  can  be 
realized  ? 

To  answer  this  question  the  social  effects  of  budgetary  pressure 
must  be  analyzed.  Wants  in  a  progressive  society  grow  more  rapidly 
than  the  means  of  satisfying  them.  This  creates  in  family  budgets 
a  state  of  chronic  deficit.  There  is  no  hope  of  relief  through  de- 
creasing costs,  because  low  prices  are  the  index  of  low  values  of  per- 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY      61 

sonal  service.  The  family  budgets  lose,  therefore,  on  the  income 
side,  all  the  savings  that  low  prices  bring  while  the  gains  from  low 
costs  accrue  to  the  benefit  of  the  replacement  fund  and  hence  raise 
profits  at  the  expense  of  personal  income.  Reductions  in  prices 
thus  increase  the  budgetary  pressure.  The  relief  must  come  from 
other  sources. 

Budgetary  pressure  comes  from  whatever  intensifies  family 
life  and  puts  its  welfare  above  other  units,  groups  or  ideals.  Its 
growth  is  mainly  due  to  the  socialization  of  ideals  by  which  personal, 
national  or  religious  standards  are  displaced  or  incorporated  into 
those  of  the  family.  Early  religions  emphasized  a  future  state, 
primitive  morality  emphasized  the  repression  of  wants,  while  national 
preservation  depended  so  fully  on  struggle  that  it  emphasized  mili- 
tary valor  and  self-effacement  at  the  expense  of  family  obligation. 
All  these  external  pressures  must  be  removed  before  social  ideals 
stand  out  in  contrast  with  those  of  primitive  societies.  The  new 
standards  are,  however,  plain  enough  to  permit  of  their  enumeration 
and  valuation:  Health,  leisure,  recreation,  education,  home,  food, 
clothing  and  social  service  are  among  the  forces  increasing  budgetary 
pressure  and  to  them  social  progress  is  due.  In  contrast  to  them, 
however,  stand  certain  other  tendencies  that  relieve  budgetary 
pressure.  Prominent  among  these  are : 

The  increase  of  personal  efficiency. 
The  industrialization  of  women. 
The  lengthening  of  the  working  life. 
The  shortening  of  the  working  day. 
The  increasing  power  of  substitution. 
The  intensification  of  activity. 
The  increase  of  family  altruism. 
The  diffusion  of  wants. 
The  socialization  of  household  expenses. 
The  increase  of  taxation. 

Most  of  these  tendencies  need  no  explanation.  An  exception  to 
this  is  the  law  of  substitution.  If  low  prices  cannot  be  secured 
through  the  competition  of  producers,  there  remains  a  possibility 
of  relief  through  the  shifting  of  consumption  from  costly  articles 
to  those  less  expensive.  The  change  from  woolen  to  cotton  clothing 


62  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

or  from  meat  to  cereal  food  illustrates  widespread  alterations  in 
consumption  that  do  much  to  relieve  budgetary  expenditure.  This 
power  grows  steadily  and  is  the  only  effective  check  to  high  prices. 
Low  prices  form  the  goal  of  industrial  progress  to  be  attained  by  the 
consumers  having  many  ways  of  satisfying  their  wants.  A  socialized 
community  has  no  effectual  escape  from  monopoly  except  by  changing 
desires  so  as  to  utilize  new  commodities.  The  fate  of  the  consumer 
lies  solely  in  his  own  hands.  The  competition  of  producers  is  a  vain 
hope  resting  on  a  misunderstanding  of  economic  motives  and  of  the 
social  forces  they  generate. 

Family  budgets  have,  however,  another  source  of  relief.  Checks 
to  expenditure  tend  to  bring  the  family  budget  to  an  equilibrium 
and  are  the  basis  of  industrial  morality.  The  effects  of  this  new 
morality  may  be  stated  in  the  following  terms : 

The  increase  of  sex  restraints. 

The  decrease  of  the  birth  rate. 

The  delay  of  marriage. 

The  economy  of  house  rent. 

The  economy  of  costly  food. 

The  economy  of  time. 

The  decrease  of  saving. 

The  increase  of  life  insurance. 

The  sacredness  of  trusts  and  contracts. 

Promptness  in  fulfilling  engagements. 

Restrictions  on  child  labor. 

The  decrease  of  luxury. 

The  reduced  use  of  intoxicating  liquor. 

The  increased  valuation  of  future  welfare. 

The  love  of  economy  for  its  own  sake. 

The  socialization  of  industrial  groups. 

Such  are  the  moral  effects  of  budgetary  pressure  and  they  rank 
high  among  the  causes  that  relieve  it.  Do  what  they  may,  however, 
there  is  still  a  net  deficit  in  the  normal  family  budget  which  must 
be  met  by  a  rising  value  of  personal  services. 

Budgetary  pressure  in  distribution  acts  either  against  vested 
income  or  it  forces  the  toiling  underworld  into  a  less  favorable  posi- 
tion. There  is  no  economic  law  that  will  prevent  or  restrain  this 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  63 

pressure.  Wage  funds  and  interest  funds  are  antiquated  concepts 
derived  from  pre-industrial  conditions.  The  power  of  survival  is 
always  in  the  hands  of  one  class.  Industry  gives  it  to  the  working 
capitalist  as  the  earlier  military  society  gave  it  to  the  leisure  class. 
Society  is  in  the  hands  of  those  who  combine  thought  and  work. 
In  this  unity  lies  the  hope  of  the  future. 


XII.     THE  HIGH  COST  OF  LIVING 

The  recent  rise  of  prices  has  created  a  demand  for  new  investi- 
gations and  new  theories  throwing  light  on  price  changes.  With 
two  theories  of  price  changes  the  public  is  already  familiar;  the 
theory  that  rising  prices  are  due  to  the  increase  of  money  and  that 
they  are  due  to  monopoly.  We  know  the  effect  of  rising  prices  on 
various  incomes,  on  business  activity,  on  the  value  of  property, 
on  saving  and  the  distribution  of  wealth.  Changes  in  monetary 
prices  have  occurred  often  enough  and  have  been  sufficiently  wide- 
spread to  establish  valid  conclusions  on  all  these  points. 

I  state  these  facts  to  suggest  that  these  two  fields  do  not  cover 
all  the  cases  of  price  changes.  The  current  high  prices  may  not 
come  from  either  of  these  causes  but  from  economic  phenomena 
not  fully  observed  and  hence  without  a  theory  for  their  explanation. 
The  demand  is,  therefore,  for  an  hypothesis  about  which  to  organize 
the  new  facts  and  then  for  statistical  investigations  to  verify  the 
preliminary  hypothesis  or  to  point  the  way  to  a  better  one. 

I  shall  start  therefore  by  asking  a  question:  what  would  be 
the  effect  on  prices  if  the  supply  of  loanable  capital  should  fall  off? 
To  answer  this  question  a  clearer  definition  of  loanable  capital  and 
a  better  contrast  between  it  and  other  types  of  capital  must  be  devised. 
Adam  Smith  thought  of  capital  as  a  stock  of  goods  annually  pro- 
duced and  consumed  by  the  participants  in  production.  By  capital 
we  now  mean  any  permanent  investment  from  which  income  is 
derived.  A  contrast  is  sometimes  drawn  between  fixed  and  circu- 
lating capital  but  of  it  little  use  has  been  made.  Economists  state 
it  and  then  pass  along  to  draw  conclusions  about  fixed  capital  which 
forms  the  bulk  of  national  investments.  In  my  opinion  the  stock 
of  Adam  Smith,  the  commodities  of  trade,  circulating  capital,  loan- 
~able  capital  and  consumers'  goods  are  practically  the  same  fund 
named  differently  as  it  appears  in  various  forms.  It  would  need  a 
more  concise  definition  to  make  them  equivalent  but  in  so  doing  we 
violate  no  usage  and  help  towards  the  acquisition  of  clear  ideas. 

Loanable  capital  must  be  in  some  mobile  form  so  that  it  can 
be  employed  in  many  ways.  A  bolt  may  be  used  or  not  used,  but 
its  destiny  is  fixed.  It  must  go  into  a  given  mechanism.  But  food 
and  clothing  may  be  used  by  different  people  and  hence  their  trans- 

(64) 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  65 

formation  may  produce  a  multitude  of  objects.  Their  direction  is 
not  determined  until  the  loan  has  been  made  and  used  up  by  given 
workers.  If  this  mobile  stock  is  in  the  hands  of  a  banker  it  is  called 
loanable  capital;  if  in  the  hands  of  a  dealer  it  is  called  commodities; 
if  talked  about  by  an  economist,  it  is  circulating  capital,  and  if  in 
the  hands  of  a  consumer,  it  becomes  consumable  goods.  The  view 
depends  on  the  problem  we  desire  to  discuss  but  in  all  the  views 
we  have  one  objective  fund  standing  in  contrast  to  the  fixed  invest- 
ments of  the  nation. 

Practically  all  loanable  capital  is  in  the  hands  of  bankers  and 
disposed  of  by  them  at  given  rates  of  interest.  The  rate  of  interest 
is  determined  by  the  return  on  circulating  capital  and  not  by  the 
return  on  fixed  investments.  It  is  fixed  by  the  difference  between 
the  value  of  the  consumable  goods  used  up  in  an  act  of  production 
and  the  consumable  goods  that  this  act  creates.  Fixed  capital 
yields  a  net  return  which  is  valued  through  the  rate  of  interest.  A 
net  return  of  $10,000  and  a  four  per  cent  rate  of  interest  means  an 
investment  value  of  $250,000.  We  then  say  this  investment  yields 
four  per  cent  when  in  reality  the  rate  of  interest  was  the  cause  of 
the  value  and  not  the  reverse.  The  measure  of  interest  comes  to 
light  only  when  consumable  goods  are  used  to  make  other  consum- 
able goods.  It  follows  from  this  that  the  rate  of  interest  is  the  index 
of  the  amount  of  consumable  goods  and  thus  of  loanable  capital.  If  it 
rises,  the  amount  of  consumable  goods  is  falling  off  relative  to  other 
forms  of  wealth.  If  this  did  happen,  would  it  affect  all  prices  alike 
and  thus  act  as  alterations  in  the  supply  of  money  do,  or  would  it 
be  felt  in  particular  ways  and  under  given  circumstances?  Here  is 
a  query  that  it  is  at  least  worth  while  to  follow  up. 

Alterations  in  the  quantity  of  loanable  capital  are  due  to  changes 
that  affect  consumers.  If  there  is  less  consumable  capital,  the  con- 
sumer has  in  some  way  altered  his  habits.  Funds  that  were  formerly 
set  aside,  and  thus  came  into  the  hands  of  bankers,  are  now  used 
in  other  ways.  This  means  that  families  have  found  new  openings 
for  expenditure  and  have  less  to  save  than  formerly.  If  this  is  true, 
a  better  tabulation  of  wealth  statistics  would  reveal  a  falling  off 
of  saving,  even  if  familiar  statements  of  facts  seem  to  prove  the 
reverse.  But  to  make  this  clear  needs  some  revision  of  definitions 
and  more  care  in  statistical  tabulation.  One  difficulty  is  in  the 
definition  of  saving.  If  a  man  working  for  wages  spends  less  than 


66  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

he  earns  the  surplus  becomes  loanable  capital.  If,  however,  he  enters 
into  business,  he  uses  his  capital  and  goes  to  the  banker  for  more. 
Small  businesses  are  of  such  a  nature  that  personal  skill  is  essential  to 
their  success.  The  capital  used  is  an  adjunct  to  the  skill  and  the 
joint  return  is  regarded  as  due  to  the  person  and  not  to  the  tool  or 
stock.  Most  capital  in  sums  of  less  than  $10,000  is  personal  capital 
of  this  sort.  Its  increase  means  a  shortage  of  loanable  capital. 
If  savings  are  defined  as  a  loanable  fund,  used  by  some  other  person 
than  the  saver,  then  savings  have  fallen  off  and  at  the  same  time  the 
personal  qualities  and  virtues  of  the  non-savers  have  increased. 

The  non-saver  of  earlier  generations  was  an  extravagant  individ- 
ual without  family  ties  or  social  motives.  Non-saving  to-day  is  a 
budgetary  pressure  forcing  alterations  in  the  family  expenditures. 
The  non-saver  is  now  a  higher  type  of  a  man  than  the  saver,  just  as 
the  saver  was  an  elevation  of  type  above  the  extravagance  of  more 
primitive  men.  This  higher  family  aims  to  create  a  flow  of  income 
to  enjoy  and  not  an  accumulating  fund  for  future  support.  Its 
striking  effects  are  manifest  in  the  pressure  to  reduce  the  birth  rate 
and  to  delay  marriage.  The  budgetary  equilibrium  is  attained 
not  by  reducing  expenditures  but  by  elevating  the  family  to  a  higher 
social  status  where  more  efficiency  produces  the  needed  income. 
This  means  an  increased  demand  for  education  and  a  delay  of  the 
time  when  children  enter  industry.  Economy  is  thus  forced  on 
each  generation  of  parents  to  put  their  children  in  a  station  above  their 
own.  This  economy  shows  itself  not  in  a  personally  unused  fund 
but  in  an  intenser  use  of  present  income.  With  a  boy  at  college  the 
family  income  is  fully  used,  the  banker  gets  no  new  funds,  deposits 
may  even  fall  off,  and  yet  by  the  pressure  the  family  is  elevated  in 
social  position  through  the  increased  earnings  of  the  son.  Measure 
by  the  year  and  there  seems  a  loss.  But  a  survey  made  after  a  half 
century  would  show  more  earning  power  and  a  better  adjustment 
of  income  to  expenditure.  Progress  is  by  epochs;  failure  shows 
itself  in  short  periods.  It  forms  the  temporary  curves  that  delay 
but  do  not  prevent  the  rise  of  standards  and  the  increase  of  welfare. 

If  we  shift  the  view  from  the  family  budget  to  that  of  the  banker, 
we  find  another  pressure  forcing  a  flow  of  capital  to  more  effective 
points.  The  function  of  a  bank  is  not  to  create  capital  but  to  econ- 
omize its  use  by  checking  the  expenditures  in  places  where  the  return 
is  low  and  causing  a  more  rapid  flow  of  capital  in  productive  directions. 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  67 

This  in  practice  brings  two  results:  investments  of  fixed  capital 
are  favored  and  personal  loans  are  concentrated  in  the  hands  of  the 
more  efficient  producers.  Increased  economy  thus  means  the  more 
effective  use  of  loanable  capital  in  the  form  of  consumable  goods, 
so  that  the  fixed  investments  may  be  increased.  Progress  is  made 
either  by  improving  the  personality  of  those  who  control  the  making 
of  consumable  goods  or  by  the  permanent  transformations  of  nature 
that  fixed  investments  promote.  The  pressure  on  the  banker  to 
find  a  more  efficient  type  of  local  producer  is  matched  by  the  pres- 
sure on  the  family  to  be  more  efficient  so  that  the  family  status 
may  be  raised.  The  family  saves  less  and  spends  more  so  as  to  bring 
this  about,  while  the  banker  uses  his  reduced  loanable  funds  to  so 
much  greater  advantage  that  the  shortage  in  savings  is  made  up  by 
the  increased  skill  of  the  banker.  Progress  thus  goes  on,  but  if  we 
look  beneath  the  surface  the  forces  that  make  it  are  radically  altered. 
Personal  efficiency  rather  than  a  growth  of  population  is  now  the 
great  force  in  increasing  wealth.  The  line  of  progress  has  been  from 
saving  to  efficiency  and  from  a  stock  of  consumable  capital  to  perma- 
nent investments  yielding  greater  income  with  less  current  expen- 
diture. With  the  uplift  of  the  personality  of  those  using  capital  has 
come  a  better  social  spirit  and  a  replacement  of  competition  by  co- 
operation. It  is  thus  easier  to  get  groups  of  producers  to  combine  to 
prevent  waste  and  when  they  combine  the  maintenance  of  fixed 
prices  is  more  readily  insured. 

High  prices  of  consumable  goods  are  thus  the  natural  result  of 
the  increase  of  personal  efficiency  on  the  one  hand  and  of  the  increased 
economy  of  circulating  capital  on  the  other.  The  need  of  increased 
efficiency  cuts  down  the  supply  of  loanable  capital  and  the  smaller 
supply  of  loanable  capital  creates  a  demand  for  more  efficiency  in 
its  use.  High  personal  incomes  are  the  complement  of  a  high  return 
on  capital.  The  scarcity  of  capital  causes  an  intenser  use  of  labor 
while  the  scarcity  of  labor  causes  an  intenser  use  of  capital.  An 
oversupply  of  cheap  labor  is  the  index  of  an  early  civilization,  while 
dear  labor  and  a  deficiency  of  loanable  capital  offer  evidence  of  a 
newer  type  manifesting  itself  in  contemporary  events.  We  have 
become  used  to  the  thought  of  a  rising  rate  of  personal  income.  We 
lack  the  complementary  thought  that  a  high  rate  of  interest  is  also 
the  index  of  progress.  The  reason  for  this  lies  in  the  acceptance  of 
an  antiquated  theory  of  distribution  making  it  appear  that  a  rise 


68  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

in  the  rate  of  interest  is  at  the  expense  of  wages.  This  is  perhaps 
true  of  a  static  society,  but  in  a  dynamic  society  the  less  effective 
forms  of  both  labor  and  capital  are  eliminated  and  from  this  change 
there  should  result  both  a  rising  rate  of  wages  and  of  interest.  The 
more  careful  investigations  of  recent  years  have  shown  the  slow  but 
steady  rise  of  wages  and  a  more  than  corresponding  improvement  in 
the  welfare  of  laborers.  It  is  more  difficult  to  prove  a  rising  rate  of 
interest.  There  have  often  been  changes  in  the  local  rate  of  interest 
but  there  has  been  no  marked  change  in  the  rate  paid  on  secure 
investments.  Either  the  rate  of  interest  has  been  a  conventional 
matter  not  indicating  the  rise  and  fall  of  profits,  or  family  ideas  of 
stability  have  altered  so  little  that  a  steady  flow  of  new  capital  has 
been  assured  without  adding  to  the  inducement  to  save.  There  are 
now  indications  that  this  is  changing.  Secure  investments  have  a 
less  favorable  market  than  formerly  which  may  indicate  a  permanent 
change  in  the  attitude  of  the  public  towards  them.  Life  insurance 
has  become  so  safe  that  it  offers  greater  security  for  the  family  than 
any  investment.  It  would  thus  seem  to  add  to  the  causes  that 
check  the  increase  of  loanable  capital,  and  in  this  way  help  to  bring 
about  a  rising  rate  of  interest. 

If  greater  personal  efficiency,  a  higher  wage,  less  loanable  cap- 
ital and  a  higher  rate  of  interest  are  parts  of  a  complementary  group 
of  changes,  there  would  result  from  their  joint  effect  a  new  adjust- 
ment of  prices  and  a  series  of  price  alterations  different  from  those 
now  recognized  as  coming  from  monopoly  or  from  alterations  in  the 
supply  of  money.  High  wages  and  high  rates  of  interest  would 
raise  the  price  of  consumable  commodities;  they  would,  however, 
lower  the  value  of  permanent  investments.  The  higher  wage  would 
reduce  the  net  income  of  permanent  investments  while  the  higher 
rate  of  interest  would  reduce  their  face  value.  A  five  instead  of  a 
four  per  cent  rate  of  interest  reduces  the  value  of  investments  twenty 
per  cent.  High  prices  of  consumable  goods  that  enter  family  budgets 
mean  also  high  wages  and  high  replacement  charges  on  fixed  capital. 
A  larger  part  of  the  total  income  of  society  thus  flows  into  family 
budgets.  While  they  are  the  index  of  blessings  in  the  hand  and  in 
the  future,  high  values  of  consumable  goods  are  a  real  hardship  when 
measured  from  year  to  year.  The  rise  in  income  comes  in  lumps 
with  the  new  efficiency  of  the  rising  generation;  the  price  changes 
are  a  steady  pressure  always  felt  and  always  the  cause  of  a  current 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY      69 

deficit.  Each  family  runs  down  as  it  grows  old  but  is  replaced  in 
the  end  by  a  new  family  on  a  higher  scale  of  existence.  The  apparent 
fall  and  the  increasing  pressure  are  thus  blessings  in  disguise,  indi- 
cating deeper  currents  that  counteract  their  visible  effects.  The 
flow  of  social  progress  is  all  in  one  direction :  the  apparent  failures  are 
in  reality  short-sighted  views  of  a  larger  evolution. 

The  important  facts  after  all  are  the  changes  through  which 
industrial  evolution  is  carrying  the  nation  and  not  the  passing  items 
of  momentary  interest.  Only  when  they  are  all  grouped  together 
and  inter-related  can  the  trend  of  progress  be  seen.  The  following 
are  some  of  the  elements  now  visible  in  industrial  life: 

1 .  High  prices  of  commodities. 

2.  Higher  family  incomes. 

3.  The  industrialization  of  women. 

4.  The  delay  of  marriage. 

5.  A  low  birth  rate. 

6.  Restrictions  on  child  labor. 

7.  The  increase  of  industrial  education. 

8.  The  increase  of  voluntary  associations. 

9.  The  reduction  of  intergroupal  competition. 

10.  The  decrease  of  speculation. 

11.  Higher  rates  of  interest. 

12.  Lower  values  of  securities. 


XIII.     VOLUNTARY  SOCIALISM 

Social  sentiment  and  social  action  are  not  closely  related.  The 
difference,  however,  is  well  defined  and  the  contrast  so  apparent  that 
some  working  compromise  between  them  should  be  found.  Social 
sentiment  is  democratic  or  socialistic.  Both  these  movements  are 
leveling  processes  bringing  men  nearer  to  an  equality  by  breaking 
down  the  barriers  of  prejudice,  tradition  and  class  difference  that 
have  kept  them  apart.  Sentiment  is  thus  a  negative  force  removing 
barriers  and  not  a  constructive  force  reorganizing  society  in  harmony 
with  new  conditions. 

In  passing  from  sentiment  to  action  two  well-defined  programs 
present  themselves — coercive  action  that  becomes  state  socialism, 
and  cooperation  which  as  group  action  becomes  voluntary  socialism. 
The  voluntary  principle  was  the  basis  of  socialism,  but  certain  errors 
of  the  early  socialists  helped  to  bring  about  the  transformation  of 
socialism  to  its  present  coercive  attitude.  They  appealed  to  the 
rational  opinion  of  individuals  biased  by  class  and  race  prejudices. 
The  so-called  rationalist  was  in  reality  a  disguised  sentimentalist 
whose  opinions  were  egoistic  and  whose  action  was  unsocial.  Opinions 
are  consequences,  not  causes.  Molding  and  reshaping  a  man,  they 
create  for  him  a  new  view  in  harmony  with  his  new  situation.  They 
are  therefore  bad  when  inherited  and  good  when  acquired.  The 
new  is  formed  through  social  action;  the  old  is  impressed  by 
imitation  and  argument.  Action  is  better  than  thought  when 
new  situations  must  be  faced.  It  is  not  the  wrestle  of  thought 
with  thought  but  of  social  group  with  social  group  that  gives  the 
final  test  in  evolution.  The  early  socialists  studied  social  movements 
and  interpreted  them  in  the  light  of  current  thought.  Marx  read 
books  and  argued  about  the  validity  of  premises.  We  should  neither 
take  the  facts  and  interpretations  of  the  earlier  socialists  nor  Marx's 
arguments.  The  problem  is  not  what  were  the  facts  or  what  were  the 
arguments  valid  in  1848  but  what  conclusions  do  current  facts  warrant 
in  1912. 

Cooperative  farm  colonies  have  not  succeeded  nor  has  profit 
sharing  been  a  success.  So  much  can  be  readily  conceded.  For  the 
advocacy  of  these  measures  the  early  socialists  merit  the  discom- 
fiture that  all  prophets  would  have  if  they  faced  the  outcome  of 

(70) 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  71 

social  progress.  It  is  one  of  the  paradoxes  of  progress  that  the  march 
of  events  inaugurated  by  reformers  moves  in  directions  not  antici- 
pated, and  often  assumes  forms  to  which  their  originators  are  radically 
opposed.  No  one  would  be  more  disappointed  than  the  martyrs 
who  have  died  for  progress  if  they  were  here  to-day  to  see  what 
events  have  wrought.  Voluntary  socialism  is  not  to-day  what  its 
originators  anticipated,  but  it  is  here  in  a  thousand  observable 
forms.  We  should  not  go  to  Owen  or  Marx  to  discuss  it,  but  should 
take  it  as  we  find  it  and  describe  it  as  it  now  exists.  Every  industry 
has  changed  from  an  antagonistic  or  individualistic  form  to  one 
of  voluntary  cooperation.  Social  movements  are  on  a  voluntary 
basis  from  which  observations  may  be  made  revealing  the  methods 
and  results  of  social  cooperation.  Progress  has  not  forced  social 
groups  into  distinct  classes,  each  with  a  bundle  of  interests  to  defend, 
but  each  interest  has  been  made  effective  by  the  formation  of  a  special 
group  to  promote  it.  We  are  all  in  many  groups  in  each  of  which 
there  are  new  faces.  Our  foes  are  not  groups  of  antagonistic  men, 
but  incompetence,  mismanagement  and  maladjustment.  Our  friends 
are  thus  personal  and  our  foes  abstract  concepts. 

This  blending  of  individuals  in  a  multitude  of  associations  keeps 
opinion  mobile  and  makes  thought  plastic.  Out  of  each  group  some 
element  of  public  opinion  comes  which  rises  into  a  principle  and  thus 
gets  a  validity  which  no  argument  can  oppose.  Even  that  which  is 
coercive  has  a  voluntary  origin.  If  we  have  coercion  in  the  future, 
it  will  not  be  the  coercion  of  Marx  but  a  coercion  of  principles  and 
habits  which  now  we  accept  as  a  voluntary  expedient. 

The  best  example  of  voluntary  cooperation  is  the  evolution  of  the 
modern  banking  world.  Having  had  an  uninterrupted  growth  for  two 
centuries  it  has  had  time  to  show  the  results  of  voluntary  action. 
State  banks  have  never  received  popular  approval,  and  large  banks 
have  always  met  with  public  opposition.  A  voluntary  growth  of 
banking  action,  opinion  and  morality  was  thus  forced  on  the  bankers 
whose  axioms  and  usages  have  no  other  means  of  enforcement  than  the 
voluntary  assent  of  those  ruled  by  them.  The  result  is  that  the 
bankers  are  the  most  social  body  in  the  world;  they  have  also  a 
high  type  of  business  morality.  The  new  morality  of  the  inter- 
national world  can  be  said  to  be  a  banker's  morality,  since  its  rules 
and  traditions  were  first  put  in  force  by  bankers.  As  the  outcome  of 
this  voluntary  growth  of  opinion,  the  banks  are  the  most  conservative 


72  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

of  all  organizations.  High  prices  and  high  rates  of  interest  have 
been  discountenanced,  the  long  view  has  become  the  banker's  view, 
while  the  gains  of  plodding  industry  have  grown  in  favor  above  those 
of  speculation  and  rash  venture.  The  public  still  has  complaints 
to  make  and  doubtless  the  evolution  of  banking  opinion  is  not  com- 
plete, but  it  is  interesting  that  these  complaints  largely  hinge  on  the 
too  great  force  of  social  usage.  If  one  banker  opposes  a  man  or  an 
enterprise  they  all  follow  suit.  They  thus  effectively  curb  one  another 
and  elevate  their  social  standards.  There  is  practically  no  competi- 
tion and  yet  for  individual  services  there  is  a  low  range  of  prices  and 
no  disposition  to  take  advantage  of  the  public  by  short-sighted  prac- 
tices. Restricted  competition,  low  prices  and  public  spirit  are  thus 
combined  in  ways  that  reveal  their  tendencies  and  show  what  other 
industrial  organizations  can  do  when  time  and  experience  have 
developed  usages  bringing  group  action  in  harmony  with  public  wel- 
fare. When  an  international  struggle  recently  was  prevented  by 
the  action  of  bankers,  all  applauded  even  if  they  failed  to  see  what 
put  the  bankers  in  opposition  to  war.  Long  experience,  however, 
has  taught  them  that  while  a  war  may  temporarily  increase  their 
profits,  they  lose  by  the  destruction  of  capital  and  the  lower  rate  of 
profits  that  follows  its  destruction.  They  may  be  as  patriotic  and 
as  desirous  of  temporary  gains  as  are  other  citizens,  and  yet  the  force 
of  socialized  banking  opinion  causes  them  to  conserve  public  welfare. 
The  bankers  really  form  the  one  effective  international  group,  and 
thus  their  action  is  based  on  the  world's  welfare  and  not  on  that  of 
individual  nations  or  classes.  Banking  morality  is  the  highest 
morality  because  it  lacks  the  limits  that  national,  local  or  creed 
morality  possesses. 

We  all  see  this  when  peace  and  war  are  at  stake.  What  we  forget 
is  that  the  same  instinct  that  restrains  war  also  restrains  useless 
construction.  A  new  railroad  may  be  advantageous  to  its  promoters 
but  it  is  as  much  a  loss  of  national  capital  as  if  it  has  been  used  as 
powder  in  a  battle.  We  think  still  worse  of  bankers  when  they  refuse 
to  help  some  industry  or  check  the  aspiration  of  some  city  or  section 
for  a  rapid  growth.  The  instinct  that  leads  to  the  refusal  is  social, 
and  raises  the  general  rate  of  profits  as  definitely  as  would  the  checking 
of  war  or  of  rash  railroad  expansion.  It  is  a  wise  judgment  that 
says  we  have  enough  railroads,  factories  and  business  enterprises, 
and  that  capital  should  be  used  to  increase  their  efficiency  rather  than 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  73 

to  make  new  rivals.  This  helps  in  the  formation  of  trusts,  and 
encourages  the  successful  business  man  at  the  expense  of  his  less 
active  competitor,  but  it  helps  also  to  improve  social  relations  and 
to  increase  social  efficiency.  This  change  in  the  conditions  of  survival 
has  come  to  stay.  Public  opinion  is  sound  not  as  it  opposes  such 
changes,  but  as  it  takes  advantage  of  the  improvements  made  and 
applies  them  in  other  fields. 

The  development  of  the  railroads  along  social  lines  has  not 
gone  so  far  as  with  bankers,  but  the  movement  is  in  the  same  direc- 
tion. Temporary  profits,  cut-throat  competition  and  the  arbitrary 
changing  of  the  rate  of  dividend  to  influence  the  stock  market  have 
not  ceased,  but  they  have  been  checked  in  their  operation.  It  is 
to-day  true,  as  it  was  not  true  yesterday,  that  some  men  are  too  bad 
to  be  permitted  to  control  a  railroad.  It  is  also  true  that  railroads 
put  their  new  capital  in  permanent  improvements  and  not  in  track 
extensions.  Large  concentrated  investments  giving  a  lower  but 
more  permanent  return,  receive  a  preference  thus  bringing  their 
action  in  line  with  public  interest. 

The  trusts  show  fewer  of  these  socializing  changes  because 
their  history  has  been  too  brief  to  create  the  group  sentiment  that 
enforces  them.  In  the  history  of  their  formation,  we  find  that 
each  failure  led  to  the  exclusion  of  the  less  social  of  the  competitors. 
Every  new  attempt  found  the  survivors  more  social  in  their  inter- 
groupal  relations,  until  the  upward  movement  was  complete  enough 
to  create  a  compact  social  group  with  a  high  sense  of  business  honor. 
Say  what  we  will  of  their  outside  conduct,  the  greater  and  firmer  the 
business  organization,  the  more  compact  is  its  social  opinion  and  the 
keener  the  realization  that  personal  honor  and  business  ability  go 
together.  Social  power  is  to-day  of  more  consequence  than  brute 
superiority.  Survival  now  is  not  an  individual  struggle,  but  a 
success  within  the  limits  of  group  action. 

Labor  organizations  are  crude  and  yet  progress  lies  in  their 
upbuilding.  Any  outside  control  of  a  group  is  bad,  because  it  is  a 
dogmatic  suppression  instead  of  an  internal  evolution.  Sound  group 
opinion  will  grow  among  the  workmen  only  as  it  is  formed  by  the 
success  of  their  organizations.  Revolutionary  ideas  are  born  in 
failure;  they  come  from  bitter  experience  and  from  short-sighted 
views.  Success  tempers  and  elevates.  It  makes  group  opinion 
social  and  group  action  conservative.  Give  the  workmen  what  they 


74  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

want  and  their  interests  will  be  found  to  correspond  to  public  welfare. 
By  this  I  do  not  mean  to  claim  that  the  interests  of  all  laborers 
and  all  employers  coincide.  That  would  go  further  than  present 
evidence  warrants.  But  it  is  true  that  the  interests  of  permanent 
investments,  and  of  the  workmen  who  operate  them,  would  be  pro- 
moted by  better  conditions  and  a  higher  wage  for  the  workers. 
Organization  gives  to  each  party  the  ability  to  enforce  its  urgent 
claims  and  creates  a  willingness  to  yield  where  the  concession  is  less 
vital.  No  one  but  the  group  can  form  its  restraints  or  elevate  its 
social  tone.  The  present  state  of  labor  disputes  is  bad  because  both 
sides  carry  such  a  load  of  dogmatic  opinion.  Only  internal  strength 
can  uproot  dogmatism.  The  greater  the  strength,  the  more  empirical 
the  judgment,  the  more  social  is  the  action.  The  cure  of  struggle 
is  the  socialization  of  the  contending  forces. 

There  is  such  a  wealth  of  examples  of  the  action  of  voluntary 
groups  that  the  only  difficulty  is  that  of  selection.  Sixty  years  of 
successful  evolution  force  a  change  of  judgment  from  prediction  to 
fact.  Instead  of  looking  ahead  and  prophesying  we  can  now  look 
back  and  review.  The  evolution  of  a  social  group  is  from  interest 
to  sentiment,  and  from  an  admiration  of  superior  persons  to  that  of 
programs.  Superior  men,  the  hero  and  martyr,  unite  groups;  their 
subsequently  formed  ideals  elevate  their  standards.  Evolution  is 
thus  from  struggle  to  cooperation,  from  personal  control  to  social 
control  and  from  concrete  rules  to  abstract  principles.  The  growth 
of  social  control  is  from  persons  to  words,  from  words  to  artistic 
expression  and  from  art  to  religion.  A  word  or  phrase  can  unite 
people  and  hold  them  together  more  permanently  than  can  any 
leader.  Art  is  more  expressive  than  words,  while  the  cosmic  emotions 
of  religion  are  deeper  and  more  unifying  than  the  social  awakening 
of  language  or  culture.  The  social  groups  grow  larger  and  the 
opposition  of  interests  diminishes  as  each  of  these  stages  is  reached. 
The  lower  diversity  of  interest  is  transformed  into  a  higher  unity. 
The  strength  of  social  bonds  lies  in  the  freedom  that  led  to  their 
perception  and  acceptance. 

There  is  also  a  change  in  judgment  accompanying  this  growth 
of  social  sentiment.  Pragmatic  judgments  replace  the  dogmatic 
decisions  of  the  earlier  stages  of  progress.  Pre-judgments  are  thus 
transformed  into  post-judgments;  experience  wins  over  opinion. 
The  state  is  the  last  surviving  form  of  dogmatic  opinion  but  even 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  75 

here  the  yielding  to  voluntary  action  is  evident.  Government  is 
now  party  government  and  political  parties  are  organizations  held 
together  by  assent.  Back  of  the  party  is  a  multitude  of  smaller 
voluntary  organizations  whose  activity  gives  it  its  force.  Govern- 
ment action  is  thus  not  a  public  decision,  but  the  action  of  some 
voluntary  group  who  for  the  time  act  as  the  state.  Laws  are  thus 
made  and  when  made  are  enforced  by  some  active  voluntary  agent 
organized  along  social  lines. 

To  have  state  socialism  would  not  create  a  new  power  above  men 
but  would  make  emphatic  the  voluntary  political  organizations  which 
control  the  state.  There  would  be  the  same  formation  of  group 
within  group  until  the  real  control  fell  into,  the  hands  of  the  more 
active  and  the  more  social.  We  are  governed  by  minorities  just  as 
industries  are  controlled  by  them.  The  problem  is  not  to  escape 
control  but  to  transform  society  so  that  wisdom  dominates.  Volun- 
tary grouping  evokes  an  ability  to  select  the  better  which  when  given 
full  expression  brings  group  action  and  social  action  into  har- 
mony. Sentiment  and  judgment  are  one  when  social  groups  are 
blended  into  one  society.  The  first  axiom  of  social  advance  is, 
never  take  the  chance  of  conflict  when  compromise  is  open.  From 
this  simple  creed  all  social  progress  comes.  The  full  moral  code  is 
but  a  more  explicit  statement  of  what  this  axiom  implies.  The 
way  of  peace  is  the  way  of  prosperity  and  there  is  no  prosperity 
without  cooperation,  toleration  and  compromise. 


XIV.    THE  AVOIDANCE  OF  STATE  SOCIALISM 

The  preceding  discussion  has  shown  the  difference  between 
socialism  as  a  sentiment  and  socialism  as  a  mode  of  thought.  State 
socialism  is  not  this  sentiment  but  a  means  of  realizing  it.  It  is  a 
program  for  attaining  industrial  ends  and  must  be  judged  in  its  rela- 
tions to  rival  programs.  The  real  contrast  in  programs  is  between 
state  socialism  which  is  coercive  in  its  action  and  voluntary  socialism 
that  has  back  of  it  the  cooperative  action  of  the  various  social  groups. 
Voluntary  socialism  was  weak  because  it  pictured  early  agricultural 
conditions  and  gave  to  each  group  a  greater  independence  than 
modern  industry  permits.  This  agricultural  grouping  was  made 
impossible  by  the  growth  of  centralized  industry.  So  long  as  the 
scale  of  production  was  growing  the  evidence  seemed  to  show  that 
industry  in  its  final  form  would  be  unified  under  state  control. 
State  socialism  is  coercive  industrial  action.  The  centralization  of 
industry  appears  to  leave  no  other  alternative.  It  must  be  either 
state  action  in  the  interests  of  the  masses  or  their  exploitation  by 
those  who  acquire  industrial  control.  Such  was  the  picture  of  1848 
and  on  it  the  recent  development  of  socialism  has  turned. 

The  conditions  of  1912  are  different  from  those  anticipated  by  the 
prophets  of  1848.  Centralized  industry  has  had  a  great  development 
but  its  limits  are  now  plainly  seen.  It  is  one  of  the  elements  of  the 
present  industrial  situation  but  without  power  to  dictate  to  other 
interests.  This  failure  to  control  leaves  open  the  way  for  other  forms 
of  social  action  of  which  so  many  are  in  active  operation  that  the 
trend  of  social  development  is  discernible.  There  is  no  industrial 
group  that  does  not  have  a  voluntary  organization  uniting  its  mem- 
bers and  voicing  its  claims.  The  industrial  groups  never  were  so 
diverse  as  at  present,  nor  so  intense  in  the  social  control  they  exercise. 
There  are  large  groups  and  strong  groups  but  no  dominating  group. 
The  law  of  social  growth  is  that  of  the  diffusion  of  interest.  This  is  a 
stronger  principle  than  that  of  the  centralization  of  industry,  and 
with  its  dominance  comes  the  strengthening  of  local  industries  in 
each  of  which  is  a  social  group  united  both  in  feeling  and  interest. 
What  type  of  action  meets  this  condition  of  diversified  industry? 
There  must  surely  be  some  way  to  progressive  action  in  such  a 

(76) 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY      77 

society,  and  this  way  must  be  different  from  the  state  socialism  a 
centralized  industry  would  force  on  a  nation. 

Back  of  these  two  types  of  industrial  organization  are  two  modes 
of  reaching  decisions  that  must  be  contrasted  before  the  issue  is 
clear.  Decisions  may  be  either  dogmatic  or  pragmatic.  Dogmatic 
decisions  are  based  on  predetermined  data  and  enforced  by  racial 
or  class  sentiment.  A  dogmatist  can  determine  what  should  be  done 
before  a  given  case  arises,  because  acts  are  judged  by  standards  set 
up  before  action  takes  place.  Pragmatic  decisions  are  made  after 
the  event  and  are  based  on  evidence  that  it  creates.  Every  pragmatic 
judgment  incorporates  new  material  in  each  decision  by  which  it  is 
modified. 

Judgments  also  differ  in  being  coercive  or  cooperative.  Coercive 
judgments  are  made  by  a  strong  group  and  then  forced  upon  the 
weaker  classes.  A  good  illustration  of  this  is  the  subjection  that 
men  have  forced  on  women.  The  strong  make  the  law  to  which  the 
weak  must  submit.  The  opposing  principle  is  that  of  cooperative 
assent.  An  example  of  this  is  found  in  international  law.  No 
modern  nation  is  strong  enough  to  impose  its  will  on  other  nations 
and  hence  general  action  must  have  the  assent  of  all  interested.  On 
this  basis  has  grown  up  a  series  of  decisions  cooperative  in  origin 
that  have  a  force  no  nation  can  resist.  These  decisions  are  pragmatic. 
International  conferences  are  not  called  to  settle  hypothetical  cases. 
The  subjects  arise  out  of  unexpected  circumstances  and  the  assenting 
nations  act  with  a  full  knowledge  of  what  the  effects  of  the  decision 
will  be.  There  is  no  blind  alley  in  international  law.  It  is  conscious 
cooperative  action  based  on  a  full  knowledge  of  the  losses  to  which 
each  nation  must  submit  and  the  gains  it  secures.  The  pressure 
of  such  a  situation  forces  each  nation  to  yield  on  points  of  less  im- 
portance in  order  to  secure  that  which  it  deems  essential.  Each 
nation  thus  gets  an  advantage  out  of  international  decisions  just  as 
it  does  out  of  international  trade.  In  both  cases  what  is  less  desired 
is  given  up  to  secure  what  is  more  important.  Pragmatic  decisions 
thus  maintain  peace  where  coercion  and  dogmatic  predetermination 
would  fail. 

The  key  to  all  social  progress  lies  in  accepting  this  principle 
and  applying  it  to  complex  industrial  situations.  Industrial  groups 
must  cooperate  in  decisions  just  as  nations  do.  Such  decisions  are 
pragmatic,  the  judges  having  full  knowledge  of  the  case,  deciding 


78  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

only  on  events  that  have  already  transpired.  Each  party  must 
yield  the  important  to  secure  the  essential.  Such  a  method  is  not 
mere  theory  but  is  in  active  operation.  It  means  the  decision  on 
industrial  differences  not  by  the  courts  nor  by  legislative  acts  but  by 
commissions  formed  after  the  dispute  arises,  with  judgments  limited 
to  present  cases  and  secured  with  the  assent  of  all  parties  concerned. 
The  courts  and  the  legislature  decide  cases  on  predetermined  data 
and  impose  their  decisions  by  force  and  not  by  cooperative  assent. 
Majorities  thus  crush  minorities  instead  of  raising  them  into  a  co- 
ordinate position.  Take  as  an  illustration  the  dispute  about  pro- 
tection and  free  trade.  The  free  trader  asserts  that  if  an  industry 
fails  to  sustain  itself  under  foreign  competition  it  should  be  permitted 
to  die  out.  The  protectionist  on  the  contrary  asserts  that  every 
industry  should  have  protection  enough  to  enable  it  to  pay  current 
wages.  Both  of  these  contentions  are  dogmatic  and  the  decision 
is  made  on  predetermined  data.  Either  principle  fully  acted  on 
would  bring  on  a  conflict  to  be  decided  only  by  the  coercive  power  of 
a  majority  vote  to  be  reversed  by  every  temporary  whim  of  the 
ruling  element.  The  pragmatic  method  would  demand  decisions 
based  on  evidence  coming  out  of  the  events  to  be  judged.  On  the 
one  hand  capital  and  labor  must  be  employed,  on  the  other  the  con- 
sumer needs  protection  against  needless  waste  of  productive  power. 
Every  case  if  treated  individually  offers  some  compromise  giving 
both  factors  what  they  most  need.  No  legislative  body  can  rightly 
settle  any  such  case  on  predetermined  evidence  or  by  deductive 
principles.  The  facts  in  dispute  must  first  arise  and  then  upon  them 
some  cooperative  decision  must  be  worked  out.  Dogmatism  and 
pragmatism  stand  opposed  in  every  industrial  decision.  The  one 
leads  to  state  socialism  and  the  other  to  intergroupal  harmony. 
The  lack  of  progress  in  settling  tariff  disputes  may  rightly  be 
compared  to  the  steady  strides  towards  international  peace.  The 
need  of  peace  is  certainly  as  urgent  as  the  need  of  free  trade.  Both 
are  based  on  sound  principles  that  must  some  day  be  universally 
accepted.  The  advocates  of  free  trade,  however,  set  up  dogmatic 
principles  based  on  predetermined  facts  and  from  them  they  judge 
current  events.  They  do  not  compromise  with  opponents  but  carry 
on  a  destructive  war  out  of  which  increased  animosities  come.  In 
contrast  to  this,  the  advocates  of  international  peace  pursue  the 
pragmatic  method.  Single  evils  are  isolated  from  the  general  effects 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  79 

of  war  and  eliminated  by  the  general  assent  of  combatants.  Every 
nation  knows  what  it  is  doing  when  it  limits  the  sphere  of  war  and 
sees  in  it  some  advantage  for  which  its  assent  was  given.  This 
pragmatic  process  would  be  as  successful  in  industrial  matters  as  in 
international  disputes.  There  is  no  majority  and  minority  in  trade 
relations  nor  is  it  a  case  of  the  good  against  the  bad.  As  many 
industrial  groups  are  involved  in  trade  disputes  as  there  are  inde- 
pendent nations  in  international  conflicts. 

Each  age  is  ruled  either  by  the  judgments  of  past  ages  expressed 
in  sentiments,  tradition  and  law  or  it  judges  its  own  acts,  expresses 
its  own  will  and  avoids  the  evils  it  sees  instead  of  those  its  prede- 
cessors assumed  would  exist.  The  rules  of  a  stable  advancing  civil- 
ization are  concurrent  estimates  of  present  welfare  and  not  pre- 
determined judgments  based  on  ancestral  anticipations.  The  change 
from  one  basis  to  the  other  is  not  a  sudden  revolution  but  the  gradual 
result  of  awakened  public  opinion.  We  have  really  gone  much 
further  than  is  apparent  in  the  application  of  the  newer  attitude  in 
legislation  and  in  settling  trade  disputes.  The  many  specific  examples 
of  its  application  need  only  to  be  recalled  to  show  their  breadth. 
The  referendum  and  the  initiative  are  crude  forms  of  concurrent 
control.  They  lack,  however,  the  cooperative  assent  needed  to  make 
them  effective.  If  such  legislation  were  limited  to  cases  where  co- 
operative assent  had  been  previously  obtained,  the  legal  enactment 
would  be  merely  a  satisfaction  of  agreements  already  secured.  The 
steps  would  then  be  like  an  international  tribunal  whose  acts  are 
only  effective  when  ratified  by  the  concurring  nations.  It  is  only 
formal  justice  that  needs  preorganized  courts.  The  unsocial  acts 
should  be  condemned  by  them  but  in  industrial  disputes  their  power 
should  be  limited  to  enforcing  delays  and  in  the  protection  of  public 
rights  until  a  properly  constituted  tribunal  can  be  formed.  Choosing 
judges,  after  it  is  known  what  the  dispute  is  about,  is  better  than 
recalling  judges  who  make  bad  decisions.  The  trouble  arises  not 
from  the  shortcomings  of  the  judge  but  from  the  temper  of  the  pre- 
cedents on  which  he  relies.  When  current  judgments  displace 
ancestral  anticipations  of  coming  evils  the  courts  and  the  public 
will  be  in  harmony  as  to  the  remedies  needed  and  both  will  replace 
their  dogmatism  by  cooperative  assent.  The  law  should  merely 
register  and  the  court  apply  decisions  reached  by  mutual  concessions 
of  the  groups  concerned. 


80  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

In  the  past  there  has  grown  up  a  buttress  to  individual  liberty 
in  the  form  of  political  rights.  When  our  national  constitution  was 
formed  no  bill  of  political  rights  was  included.  The  defect  however 
was  soon  remedied,  thus  creating  a  limitation  to  majority  rule  which 
has  been  an  important  element  in  national  stability.  If  this  is  true 
in  regard  to  political  rights,  it  is  equally  important  in  industrial 
disputes  where  suppression  of  weak  groups  by  the  strong  is  as  danger- 
ous as  is  the  political  dominance  of  majorities.  There  is  as  much  need 
of  economic  rights  as  there  was  for  political  rights.  A  right  is  an 
effectively  expressed  sentiment  that  carries  with  it  a  self-condemna- 
tion of  its  violation.  It  gives  the  individual  or  group  a  clear  basis 
on  which  to  make  an  appeal  and  furnishes  a  test  of  where  the  strong 
are  over-riding  the  weak.  Such  a  bill  of  rights  could  be  readily 
formulated ;  it  would  check  aggression  and  arouse  sympathy  in  behalf 
of  the  industrially  wronged.  In  another  place4  I  have  formulated 
a  bill  of  economic  rights  that  would  correspond  to  the  political  rights 
now  a  part  of  our  constitutional  guarantee.  I  will  restate  some  of 
them  so  that  the  content  of  such  a  bill  can  be  apprehended.  The 
more  obvious  rights  are  these : 

The  right  to  security. 

The  right  to  publicity. 

The  right  to  an  open  market. 

The  right  to  customary  prices. 

The  right  to  share  in  national  prosperity. 

The  right  to  cooperate. 

The  right  to  decision  by  public  opinion. 

The  right  to  wholesome  standards. 

The  right  to  leisure. 

The  right  to  cleanliness. 

The  right  to  recreation. 

The  right  of  women  to  income. 

The  real  dangers  of  state  socialism  do  not  lie  in  its  bolder  schemes, 
but  in  policies  that  appeal  more  directly  to  social  sentiment.  Op- 
position to  banks,  railroads  and  the  trusts  is  not  so  much  against 
the  present  form  of  these  industries  as  to  their  high  profits.  We 
may  expect  a  strong  movement  that  has  the  equalization  of  profits 
as  its  end,  but  there  is  nothing  in  such  a  movement  that  would  lead 

4  Theory  of  Prosperity,  chap.   vi. 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  81 

to  the  nationalization  of  these  industries.  There  is,  however,  danger 
wherever  social  sentiment  is  made  the  determiner  of  public  policy. 
The  strongest  emotional  appeal  of  state  socialism  is  for  pensions 
and  for  a  minimum  wage.  The  road  to  them  has  already  been  opened 
by  our  generosity  to  military  heroes  and  by  the  precedents  set  by 
foreign  nations.  In  the  appeal  of  the  industrially  poor,  however, 
we  should  not  forget  the  long  standing  appeal  of  those  afflicted  with 
disease  or  inherited  defects.  The  problem  is  not  whether  industry 
or  heredity  create  the  greater  evils,  but  which  of  these  groups  of 
evils  can  be  first  attacked  and  removed.  We  know  the  source  of 
hereditary  defects  and  have  also  learned  that  they  cannot  be  cured 
by  environmental  improvement.  The  defective  and  delinquent 
classes  must  be  segregated  if  they  are  to  be  eliminated  and  thus  a 
place  made  for  a  better  stock.  It  is,  however,  a  temporary  burden 
to  be  removed  after  a  generation  of  generous  care  and  faithful  atten- 
tion. The  science  of  eugenics  tells  us  how  to  proceed  and  sound 
reasoning  makes  plain  the  social  uplift  that  would  follow  its  applica- 
tion. In  this  field  a  social  appeal  can  be  made  fully  as  strong  and 
more  effective  than  in  any  other  field.  The  sources  of  industrial 
evils  are  removed  by  altering  the  conditions  under  which  industry 
is  carried  on.  It  is  against  these  conditions  that  social  sentiment 
should  turn.  Premature  old  age  should  be  prevented  rather  than 
supported.  Educating  the  young  to  avoid  dangers  is  better  than 
pensioning  those  who  fall  into  them.  Changes  at  the  source  of 
industrial  evils  effect  more  than  the  same  effort  in  time  and  money 
used  to  alleviate  the  suffering  caused  by  bad  conditions.  It  is  a 
good  axiom  never  to  act  until  the  source  of  an  evil  is  known  and 
then  to  attack  the  source  and  not  the  result.  Were  this  axiom  acted 
upon  we  would  first  remove  the  evils  due  to  heredity  and  then  with 
a  clearer  vision  reorganize  industry  so  that  the  worker  is  conserved 
and  elevated.  We  can  mold  industry  as  we  will  when  we  see  what 
form  we  wish  it  to  take. 

The  general  principles  of  cooperative  action,  however,  are 
more  important  than  their  specific  applications.  Either  majorities 
have  the  right  to  impress  their  ideas,  sentiments  and  institutions  on 
minorities,  or  social  decisions  need  the  approval  of  the  groups  affected 
by  them.  The  one  method  is  that  of  dogmatic  impressment,  the 
other  of  cooperative  assent.  There  is  no  compromise  between 
ideals  so  different  in  their  origin  and  in  their  goal.  Industry  must 


82  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

square  itself  with  other  forms  of  progress,  and  as  it  does  coercion 
and  exploitation  will  be  displaced  by  cooperative  action.  When 
the  state  merely  registers  what  mutual  assent  has  already  attained 
industrial  peace  will  be  as  stable  as  international  peace  will  be  when 
arbitration  is  universally  applied.  Both  fields  demand  the  same 
methods:  victory  in  either  field  will  strengthen  the  cause  of  peace 
in  the  other. 


XV.     THE  MEASURE  OF  PROGRESS 

Last  summer  I  met  a  Second  Adventist  who,  in  harmony  with 
the  views  of  his  sect,  saw  in  the  passing  events  proof  that  the  world 
was  approaching  its  final  crisis.  The  Bible,  history  and  current 
events  were  interpreted  in  light  of  the  belief  that  they  gave  evidence 
of  an  immediate  catastrophe.  To-day  such  views  are  striking 
because  they  are  rare.  Yet,  odd  as  they  seem,  they  are  a  remnant 
of  old  beliefs  that  before  the  age  of  science  were  generally  held.  No 
one  then  thought  that  the  world  or  its  civilization  was  enduring. 
Every  one  looked  for  signs  of  the  coming  end  and  accepted  without 
question  the  various  prophecies  based  on  such  data.  A  belief  in 
progress  is  new.  If  man  was  made  perfect  and  fell,  tests  of  devolu- 
tion constitute  the  only  science  worth  investigating.  The  devolution 
of  the  Adventists  has  been  discredited  by  the  progress  of  science. 
Social  devolution  is  even  now  a  common  belief.  It  colors  history, 
gives  rise  to  revolutionary  views  of  politics,  and  makes  economic 
doctrine  pessimistic.  Were  it  merely  an  academic  belief,  it  might 
be  left  to  die  out  in  its  own  way.  It  is,  however,  an  important 
element  both  in  socialistic  literature  and  in  economic  thought. 
That  capitalism  must  go  down  in  a  tragedy  appeals  to  an  instinct 
too  deep  seated  to  be  ignored.  The  same  is  true  of  the  oft-stated 
economic  doctrine  that  the  resources  of  the  world  are  diminishing, 
and  that  in  the  crash  civilization  will  go  down  before  some  form  of 
barbarism. 

While  the  orthodox  economist  and  the  socialist  who  use  these 
pictures  have  a  greater  appearance  of  presenting  the  truth  and  state 
their  arguments  more  in  harmony  with  history  and  science,  the 
sentiment  they  evoke  is  the  same  as  that  the  Adventist  arouses  with 
his  crude  pictures  of  ruin  and  failure.  They  are  pre-evolutionary 
views,  appealing  to  fear  and  wonder,  and  resting  on  a  confused  state- 
ment of  the  facts. 

Such  views  are  hard  to  controvert  because  of  the  crude  logic 
their  advocates  use.  They  review  current  events  for  evidences  of 
disaster  and  then  by  an  accumulation  of  historical  data,  create  a 
picture  of  misery  and  failure.  If  their  view  is  opposed  by  a  pre- 
sentation of  the  happier  phases  of  life,  they  call  their  opponents 
optimists.  Scientific  economics  is  thus  made  to  consist  of  depress- 

(83) 


84  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

ing  facts  that  call  for  forceful  action.  If  the  optimism  of  Godwin 
and  Owen  is  put  against  the  pessimism  of  Ricardo  and  Marx,  it  is, 
indeed,  hard  to  decide  which  is  the  better.  They  both  assume  that 
happiness  is  the  normal  state  of  all  men,  and  then  they  try  to  show 
how  social  institutions  fail  to  secure  it.  But  is  the  contrast  thus 
made  valid  and  fundamental?  Are  men  either  happy  or  miserable 
or  are  they  under  ordinary  conditions  both  happy  and  miserable? 
If  the  latter  is  the  reasonable  attitude,  evidence  as  to  the  happiness 
or  misery  of  mankind  is  beside  the  main  issue.  There  are  no  valid 
tests  by  which  pleasure  and  pain  can  be  quantitatively  compared. 
The  individual  judgment  is  usually  clear,  but  we  have  no  comparative 
means  of  measuring  happiness  and  hence  the  judgments  based  on 
such  evidence  are  not  of  much  consequence  whichever  side  they  are  on. 

Believers  in  progress  are  not  in  the  same  position  to-day  as 
they  were  in  the  age  of  Ricardo  and  Marx.  The  theory  of  organic 
evolution  has  been  unfolded  and  from  it  come  tests  both  of  evolu- 
tion and  devolution.  A  theory  of  progress  should  now  start  not 
from  surveys  of  happiness  and  misery,  but  from  the  evidence  of  the 
general  evolution  in  which  both  men  and  society  have  a  part.  From 
this  it  will  be  seen  that  struggle  brings  both  happiness  and  misery — 
happiness  to  the  successful  and  misery  to  the  vanquished.  The 
presence  of  misery  is,  therefore,  no  evidence  of  the  failure  of  evolu- 
tion. We  evolve  through  misery  as  much  as  through  happiness. 
It  is  only  the  abiding  effects  measured  in  physical  units  that  tell 
which  force  is  dominant,  and  to  these  tests  we  should  turn  to  decide 
the  truth  or  falsity  of  human  progress. 

If  socialists  had  formulated  a  law  of  the  persistence  of  misery 
instead  of  the  increase  of  misery,  they  would  have  been  on  safe  ground. 
We  know  that  misery  persists  but  we  have  no  measure  of  its  increase. 
Happiness  tests  have  been  displaced  by  evolutionary  standards 
which  are  capable  of  definition  and  measurement.  Changes  for  the 
worse  in  physical  conditions  are  likewise  no  test  of  devolution.  They 
accentuate  struggle  and  hasten  the  elimination  of  the  weak.  Nor 
can  we  infer  retrogression  from  deductions  based  on  the  law  of  dimin- 
ishing returns.  Professor  Carver  in  a  recent  article5  gives  three 
a  priori  tests  of  diminishing  returns  and  hence  of  retrogression :  the 
spread  of  population,  the  concentration  of  population  in  cities  and 
the  introduction  of  inventions.  He  contends  that  population  would 
not  spread,  cities  would  not  grow  nor  would  inventions  be  made 

6"A  Bugbear  to  Reformers,"  Popular  Science  Monthly,  May,  1912. 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  85 

unless  they  were  forced  by  a  pressure  of  deficit.  They  are  thus 
evidence  of  increasing  misery  and  represent  what  mankind  should 
avoid.  Such  a  position  is  pre-evolutionary.  If  an  animal  spread 
over  a  continent,  a  biologist  would  assume  that  it  was  improved 
by  the  change.  So,  too,  the  presence  of  more  animals  in  a  locality 
or  in  closer  relations  to  each  other  would  indicate  not  degeneration 
but  the  evolution  of  new  psychic  qualities.  Invention  is  also  an  index 
of  greater  mental  power  and  not  of  greater  devolutional  pressure. 
That  the  spread  of  population  and  the  growth  of  cities  often  increase 
misery  may  be  readily  admitted  without  in  the  least  impairing  the 
proof  that  progress  is  also  taking  place. 

Devolution  cannot  be  predicated  from  a  knowledge  of  environ- 
mental conditions  no  matter  how  poor  they  may  be.  No  accurate 
measure  is  possible  until  the  reaction  of  the  animal  to  this  environ- 
ment has  created  definite  structural  modifications.  Devolution 
is  a  matter  of  animal  structure  and  not  of  environment.  It  is  retro- 
gression without  growth.  Of  it  there  are  two  tests,  revision  and 
retardation.  Animals  retrogress  by  going  back  to  some  ancestral 
form,  or  they  are  retarded  in  growth  and  thus  do  not  attain  a  full 
development.  Devolution  does  not  create  new  forms:  it  revives 
old  ones  and  prevents  the  appearance  of  the  higher  attributes. 
Degenerates  should  be  cared  for  and  finally  eliminated,  but  their 
misery  should  not  be  added  up  to  arouse  social  sentiment  or  to 
determine  the  effect  of  social  change.  We  cannot  measure  devolu- 
tion in  terms  of  civilization,  of  happiness  and  misery,  of  wages  or  of 
poverty.  The  evidence  of  statistics  and  history  is  poor  when  com- 
pared with  that  of  biology.  The  burden  of  proof  is  thus  against 
those  who  would  show  an  increase  of  misery  without  some  compensa- 
tion in  growth  or  in  social  uplift. 

In  changing  from  the  consideration  of  devolution  to  evidence 
of  progress  a  contrast  must  be  made  between  political  stability  and 
social  evolution.  The  danger  of  political  instability  has  been  so 
great  and  its  evils  so  manifest  that  political  theory  has  evolved  as  a 
theory  of  stability  rather  than  of  progress.  Political  stability  has 
arisen  in  modern  nations  by  substituting  majority  rule  and  average 
happiness  for  the  cruder  tests  of  numbers  and  strength.  Political 
theory  assumes  that  an  equal  distribution  of  happiness  gives  greater 
security  than  its  concentration.  Wage  theories  and  subsistence 
theories  have  thus  arisen  through  which  the  equality  of  man  has 
been  proclaimed.  The  doctrine  that  every  man  counts  for  one, 


86  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

checks  aggression  when  applied  to  food  and  wages.  It  leads,  however, 
to  a  pure  individualism  in  which  group  action  has  no  place.  Society 
is  changed  from  an  organism  to  a  mob,  thus  checking  the  rise  of  social 
sentiment  through  which  a  higher  unity  comes.  From  brute  strength 
to  majority  rule  is  progress,  but  still  more  comes  when  minorities 
through  compromise  and  toleration  displace  the  need  of  majority 
coercion. 

When  the  difference  between  political  stability  and  social  evo- 
lution is  recognized  the  need  of  a  new  measure  of  progress  becomes 
apparent.  We  assume  that  when  men  have  equal  income,  they  are 
equally  happy.  While  this  political  axiom  leads  to  political  stability, 
it  does  not  help  to  create  new  adjustments.  To  get  evolutionary 
tests,  we  must  start  from  the  physical  tests  that  have  back  of  them 
the  authority  of  science.  Thought,  motive  and  product  although 
indices  of  a  higher  mental  life,  are  not  measurable  in  masses  so 
that  a  transfer  may  be  made  from  individual  judgments  to  social 
predicates.  The  one  sure  test  is  the  structure  through  which  they 
arise.  If  structures,  mental,  physical  or  social  alter,  we  may  be  sure 
that  a  racial  evolution  has  taken  place.  To  accurately  measure 
thought,  motive  or  product,  we  need  a  complete  record  of  all  thought, 
all  activity  and  all  products.  Such  history  and  such  statistics  are 
impossible.  The  history  we  have  is  a  record  of  social  struggle  and 
not  of  human  activity.  Few  would  claim  that  the  tabulated 
statements  of  thought,  action  and  wealth  are  accurate  enough  to 
make  them  available  for  social  deductions.  Fortunately,  however, 
there  is  one  test  that  abides  and  reveals  the  net  result  of  all  past 
action.  Structure  evolves  through  pressure  of  thought,  motive, 
action  and  product.  What  people  do  becomes  history;  what  they 
get  becomes  happiness:  the  abiding  effects  of  what  they  do  and  get 
become  social  structure.  Action  in  social  terms  is  character;  product 
ensures  happiness;  neither  of  these  is  inheritable.  Only  structure 
is  passed  along  and  modifies  the  race.  For  this  reason  social  meas- 
urements improve  as  they  pass  from  activity  to  the  product  of  activ- 
ity, and  from  this  product  to  the  structure  that  shapes  the  activity. 

The  first  test  of  structure  is  its  activity.  The  more  active 
are  the  more  advanced  in  organization.  The  second  test  is  in  sur- 
plus. This  measures  the  economy  of  effort  and  the  excess  of  return 
over  cost.  The  third  test  is  invention.  This  is  the  measure  of  prog- 
ress in  thought.  The  fourth  test  is  wealth.  It  shows  the  structural 
changes  in  the  environment  which  remain  to  aid  future  generators. 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  87 

The  fifth  test  is  the  growth  of  will  power.  Will  is  more  than  the 
abstract  power  of  choice.  It  is  surplus  energy  moving  through  im- 
proved mental  mechanisms. 

Social  changes  should  show  more  than  the  physical  background 
in  structure  and  yet  should  be  directly  related  to  it.  Viewed  in  this 
way  the  first  social  measure  of  progress  is  the  desire  for  intenser 
forms  of  happiness  in  the  place  of  quantitative  satisfactions.  The 
second  is  the  removal  of  fear.  The  third  is  the  stability  of  social 
institutions.  The  fourth  is  the  growth  of  voluntary  associations. 
The  fifth  is  the  growth  of  the  spirit  of  toleration  and  of  decision  by 
compromise  instead  of  by  struggle.  Each  of  these  changes  indicates 
a  growth  of  social  structure  and  an  advance  in  social  evolution. 
There  is  no  mechanism  for  social  degeneration.  If  it  comes,  its 
source  is  not  in  society  but  in  its  physical  Background.  No  social 
evidence  can  prove  decay  except  as  it  corroborates  what  physical 
retrogression  has  made  plain. 

Progress  in  these  physical  phases  is  beyond  dispute.  The 
burden  of  proof  is  against  those  who  use  historical  examples  or  a 
crude  tabulation  of  social  facts  to  disprove  what  more  fundamental 
evidence  shows  to  have  an  evolutionary  support.  The  new  tests 
are  so  plain  that  they  can  readily  be  set  over  against  their  pre- 
evolutionary  predecessors.  Thought  is  being  modified  to  meet  the 
new  conditions  even  if  it  has  not  gone  far  enough  to  give  the  new 
an  irresistible  force.  This  point  I  shall  not  argue  but  will  illus- 
trate by  putting  in  contrast  the  older  and  the  newer  tests  of  social 
improvement. 

OLD  TEST  NEW  TEST 

In  life  Happiness  Health 

In  physical  superiority  Strength  Endurance 

In  mental  superiority  Understanding  Originality 

In  production  Population  Wealth 

In  social  organization  Liberty  Cooperation 

In  character  Integrity  Efficiency 

In  rivalry  Brutality  Manliness 

In  disposition  Amiability  Generosity 

In  logic  Dogmatism  Pragmatism 

In  business  Shrewdness  Squareness 

In  art  Appreciation  Expression 

In  religion  Submission  Inspiration 


88  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

All  these  tendencies  have  a  common  source  and  a  common  meas- 
ure. They  show  the  trend  of  progress  and  put  its  result  on  a  firm 
basis.  The  lesson  is  plain.  Prophets  of  disaster  are  a  remnant  of 
an  older  epoch.  The  new  economics  rejects  superficial  facts  and 
the  dogmatic  attitude  they  presuppose.  Its  evidence  is  corroborated 
by  organic  changes  that  cannot  be  reversed  by  the  effect  of  occur- 
rences of  present  interest  but  of -no  permanent  value. 


XVI.     THE  OUTLOOK 

While  I  cannot  claim  to  have  made  a  complete  restatement  of  eco- 
nomic theory,  enough  has  been  given  to  show  the  nature  of  the  thought 
transformation  now  taking  place.  It  is  essential  to  recognize  that 
we  have  passed  from  one  epoch  to  another  and  that  our  principles 
and  facts  must  be  correspondingly  modified.  We  live  in  1912  but 
think  in  terms  of  1848.  This  is  due  to  the  fact  that  several  men 
then  expressed  the  dominant  tendencies  so  forcefully  that  their 
mode  of  thinking  has  been  impressed  too  deeply  to  permit  current 
facts  to  have  their  full  weight.  The  past  epoch  was  one  of  natural 
and  class  readjustment.  It  intensified  struggle  and  aroused  class 
antagonisms.  It  is  a  mistake  to  give  much  weight  to  the  evidence 
of  this  epoch:  its  appeal  was  after  all  local  and  temporary.  It  is 
even  worse  to  attribute  the  thought  development  to  any  one  man. 
Marx  was  as  much  a  creature  of  this  environment  as  was  Mill, 
Carlyle  or  Carey.  They  had  the  same  facts  before  them  and  acted 
on  common  principles.  Their  differences  are  details  for  their  fol- 
lowers to  wrangle  about.  Their  similarities  are  a  common  heritage 
forcing  us  to  act  in  a  different  way  from  what  we  should  have  done 
if  this  epoch  had  not  remodeled  social  concepts.  The  national  and 
class  readjustment  has  now  taken  place,  struggle  has  been  limited, 
and  national  sentiments  are  turning  into  new  directions.  We  can, 
therefore,  tell  something  of  the  trend  of  events  and  of  the  forces  now 
in  the  making. 

Two  results  of  the  preceding  epoch  form  the  basis  of  the  antic- 
ipations I  now  venture  to  give.  One  is  that  political  stability  has 
been  secured.  All  of  the  nineteenth  century  thinkers  were  filled 
with  dismal  forebodings  as  to  the  stability  of  modern  nations,  and 
this  fear  had  much  to  do  with  the  forecast  they  made.  Mobs  can 
now  be  as  readily  handled  as  could  an  attempted  invasion  of  barba- 
rians. The  fall  of  civilization  from  either  of  these  sources  is  no  longer 
to  be  dreaded.  Nations  and  classes  are  stable  units.  It  is  economic 
fact  not  brute  passion  that  now  determines  public  opinion. 

The  second  fact  equally  apparent  is  that  we  have  entered  a  new 
epoch.  The  industrial  revolution  through  which  modern  nations 
have  passed  has  had  four  recognized  epochs.  The  first  may  be  called 
a  national  economy  and  in  it  the  mercantile  school  voiced  the  demand 

(89) 


90  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

for  local  industries.  In  the  main  this  economy  was  due  to  the  divi- 
sion of  labor  and  to  the  spread  of  industry  to  new  regions.  The  second 
epoch  was  that  of  free  trade,  in  which  England  comes  to  the  front 
as  the  representative  of  advanced  industry.  The  third  epoch  was 
an  economy  of  unused  resources:  during  this  epoch  there  was  a 
spread  of  agricultural  population  and  the  rise  of  new  nations,  of 
which  America  is  the  prototype.  The  fourth  epoch  was  that  of  large 
production,  in  which  concentrated  wealth  became  the  controlling 
power  both  social  and  political. 

If  these  epochs  had  brought  industrial  evolution  to  a  close,  the 
anticipations  of  Marx  would  have  been  realized.  The  poor  and  the 
rich  would  have  been  isolated  and  all  struggles  would  have  resolved 
themselves  into  a  conflict  between  the  two.  But  evolution  did  not 
stop  here.  We  have  entered  into  a  new  economy  in  which  personal 
and  local  advantages  are  exploited  as  effectively  as  were  the  central- 
ized advantages  of  the  last  epoch.  The  present  struggle  is  not 
between  the  rich  and  the  poor  but  between  centralized  and  localized 
wealth.  Personal  and  local  advantages  are  much  more  numerous 
than  are  those  on  which  the  success  of  the  great  industries  turn. 
Political  control  is  thus  in  the  hands  of  those  interested  in  local 
industries  and  in  personal  income.  Under  these  conditions,  the  old 
contrast  between  the  rich  and  the  poor  has  ceased  to  be  vital  and  in 
its  place  will  come  a  new  alignment  of  the  social  groups. 

To  determine  the  changes  that  will  thus  be  wrought  a  more 
definite  theory  of  progress  is  needed.  Prediction  in  the  past  has 
been  prophesy  based  on  historical  interpretations  or  the  picturing 
of  Utopian  ideals.  More  definite  measures  of  progress  than  either 
of  these  are  now  available.  Progress  can  be  measured  through  the 
increase  of  wealth,  thus  giving  a  material  interpretation:  it  can  be 
measured  through  the  structural  changes  that  evolution  has  wrought ; 
or  it  can  be  measured  through  the  social  control  of  classes  or  races. 

Social  control  is  the  repression  of  the  weak  by  the  dominant. 
Acting  through  acquired  characters  it  makes  no  structural  change. 
Any  shift  in  industrial  conditions  or  in  the  location  of  natural  resources 
can  bring  a  new  class  to  the  front  and  with  their  ascendency  a  new 
form  of  control  is  exerted.  Of  these  forms  of  control,  democratic 
control,  which  is  the  control  of  numbers,  is  especially  important. 
Democracy  has  adopted  without  question  the  utilitarian  axioms 
and  thus  has  accepted  the  quantity  and  distribution  of  happiness 


THE  RECONSTRUCTION  qr  ECONOMIC  THEORY  91 

as  the  measure  of  progress.  Every  one  in  this  calculus  counts  as  a 
unit  and  no  one  as  more  than  one.  With  happiness  measured  in 
material  goods,  this  standard  makes  the  distribution  of  wealth  more 
prominent  than  its  production.  The  control  of  income  seems  a  social 
necessity  and  with  it  arise  new  functions  for  the  state. 

Social  control  rests  on  opinions  and  not  on  social  structure. 
It  is  a  development  of  thought  and  not  of  activity.  It  is  hard, 
therefore,  to  predict  what  changes  in  control  will  be  made  other  than 
that  utilitarian  control  is  likely  to  undermine  the  control  of  precedent, 
tradition  and  wealth.  This  would  create  a  simpler  society  than  we 
have  at  present,  but  it  would  not  be  a  final  nor  even  stable  form  of 
society.  Structural  development  would  continue  and  with  each 
marked  change,  opinions  would  alter  and  thus  create  a  new  form 
of  control.  No  measure  of  progress  is,  therefore,  valid  that  does 
not  recognize  the  need  of  structural  change  and  the  fundamental 
character  of  alterations  made  by  it.  Opinions  about  progress  are  of 
little  consequence  unless  we  can  show  structural  changes  that  bring 
what  we  predict. 

Such  statements  seem  vague,  but  they  are  readily  transformed 
into  objective  standards.  Social  structure  shows  itself  in  three 
definite  forms:  in  health,  in  wealth  and  in  culture.  We  cannot 
tell  how  happy  a  man  is,  but  we  can  determine  the  state  of  his  health. 
Income  is  a  better  test  of  welfare  than  happiness,  but  it  is  not  so 
accurate  a  test  as  health.  The  activities  connected  with  production 
are  predetermined  by  the  situation  in  which  it  takes  place.  Dis- 
tribution, however,  is  a  matter  of  opinion.  There  are  no  income 
structures  to  shape  its  distribution  as  there  are  productive  structures 
to  create  it.  Structural  activity  produces  wealth:  men  distribute 
it.  This  is  a  revised  statement  of  Mill's  introduction  to  his  theory 
of  distribution  but  it  is  no  less  true  in  its  new  form  than  in  the  old. 

We  think  of  culture  as  the  final  product  of  civilization  and  not 
as  one  of  its  elements.  Yet  if  we  look  at  the  facts,  we  find  that 
culture  is  an  index  of  activity,  not  of  ancestral  tradition  and  opinion. 
Social  tradition  has  been  broken  more  in  the  field  of  culture  than 
elsewhere.  It  is  no  longer  the  admiration  of  the  old  or  of  the  foreign 
but  an  intenser  form  of  enjoyment  than  that  yielded  by  traditional 
pleasures.  Wealth  is  the  consequence  of  effective  activity  in  pro- 
duction. Culture  is  the  result  of  more  satisfying  combinations  in 
its  consumption.  Both  are  in  a  like  manner  determined  by  struc- 


92 


THE  ANNALS  OF  THE  AMERICAN  ACADEMY 


tural  activity.      Every  new  product  modifies  the  direction    which 
culture  takes. 

In  former  descriptions  of  progress,  I  divided  it  into  two  parts, 
a  pain  economy,  in  which  fear  and  suffering  drive  man  to  his  daily 
tasks,  and  a  pleasure  economy,  in  which  the  motive  of  action  is  the 
pleasure  derived  from  the  goods  enjoyed.  I  now  regard  this  division 
as  defective.  To  love  pleasure  is  a  higher  manifestation  of  life  than 
to  fear  pain;  but  the  pleasure  of  action  is  in  advance  of  the  pleasure 
of  consumption.  Action  creates  what  pleasure  uses  up.  This  would 
divide  progress  into  three  stages :  a  pain  economy,  a  pleasure  economy 
and  a  creative  economy.  Each  stage  has  its  own  mode  of  thought, 
and  its  own  social  institutions.  To  visualize  the  elements  of  these 
stages,  I  have  put  them  in  the  following  table : 


STAGE  OF  FORM  OF 

PROGRESS.  STRUGGLE. 

1.  A  pain  economy.        Race  struggle. 

2.  A  pleasure  economy.  Class  struggle. 

3.  A  creative  economy.  Self  direction. 


FORM  OF 
CONTROL. 

Ancestral  control. 
Wealth  control. 


CHARACTER  OF  THE 
SOCIAL  BONDS. 
Blood  bonds. 
Interest  bonds. 


Character  control.       Social  beliefs. 


TYPE  OF 
THOUGHT. 

THOUGHT 
LIMITATIONS. 

KIND  OF 
PHILOSOPHY. 

TYPE  OF 
MORALITY. 

1.  Theological. 
2.  Rational. 
3.  Pragmatic. 

Substance. 
Space. 
Time. 

Anthropomorphic. 
Material. 
Ideal. 

Traditional. 
Utilitarian. 
Telic. 

The  transformation  of  activity  and  thought  which  this  third 
economy  imposes  has  already  taken  place  or  at  least  the  change 
has  gone  so  far  that  its  outline  is  manifest.  It  is  more  difficult  to 
predict  the  uplift  in  sentiment  that  it  will  bring.  The  emotions  of 
the  older  epochs  were  centered  about  religious  and  race  antagonisms. 
Evils  have  been  clearly  perceived  objects  with  definite  local  manifes- 
tations. Heroes  and  gods  also  made  a  personal  appeal  and  kept 
the  emotions  too  specific  to  bring  out  their  social  possibilities.  To 
build  up  social  sentiments  demands  the  elimination  of  struggle  and 
fear  on  the  one  hand,  and  of  personal  renunciation  and  hero  worship 
on  the  other.  Social  life  seems  incapable  of  making  use  of  these 
primitive  reactions  and  thus  lacks  the  effectiveness  of  the  older 
more  animal  life.  Neither  the  rational  nor  the  utilitarian  logic 
has  ever  done  more  than  to  arouse  mild  cosmopolitan  sentiments 
that  pleased  the  philosopher  but  failed  to  vitalize  the  man  of  the 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  93 

street  and  shop.  For  such  a  condition  there  must  be  a  remedy  if 
the  new  life  is  to  arouse  men  as  effectively  as  did  the  old.  Senti- 
ment and  thought  should  not  be  antagonistic  nor  should  sentiment 
be  crushed  by  the  growth  of  logic  and  science.  To  prevent  this 
catastrophe,  thought  must  be  reorganized  so  that  its  concepts1  create 
emotional  reactions  as  definite  and  as  prompt  as  did  the  vivid  rela- 
tions that  struggle  originated.  Thought  stimuli  must  be  put  in  the 
place  of  sense  stimuli,  and  thought  ends  in  the  place  of  the  victory 
struggle  sets  as  a  goal. 

A  step  has  been  taken  in  this  direction  by  the  shifting  of  interest 
from  the  past  to  the  future.  History  is  a  history  of  struggle,  and 
usually  of  defeat.  By  the  emphasis  it  gives  to  retrogression  and 
decay,  it  increases  struggle  and  makes  present  personal  success  vivid 
and  vital.  The  thought  of  progress  gives  a  new  turn  to  the  emotions 
by  giving  them  a  new  goal.  We  become  social  as  we  look  forward; 
more  animal  as  we  look  back.  The  dread  of  the  future  must  be 
changed  into  an  eager  anticipation  before  the  new  emotions  will  be 
as  vivid  as  the  antagonisms  that  the  past  provoked. 

From  this  it  is  easy  to  see  why  the  future  should  become  promi- 
nent in  socialistic  schemes  before  a  like  reorganization  of  the  popular 
thought  can  take  place.  Progress  can  not  be  visualized  in  past 
events.  Its  goal  is  ahead  and  must  come  through  a  social  reconstruc- 
tion of  ideals  and  a  material  reconstruction  of  wealth  products. 
Progress  is  necessarily  economic  because  its  embodiment  is  material 
and  environmental.  Social  antagonisms  thus  stand  opposed  to  prog- 
ress. From  this  it  seems  to  follow  that  progress  comes  through 
emotional  suppressions,  thus  creating  the  Utopian  stage  illustrated  by 
the  early  English  socialism.  Marxianism  is  a  reversion  to  the  prim- 
itive attitude  and  the  acquisition  of  a  driving  power  in  class  antag- 
onism. Socialism  has  not,  however,  abandoned  the  earlier  ideals, 
contradictory  as  they  may  be  to  the  material  tendencies  of  Marx. 
Back  of  conflict  loom  up  clearly  defined  pictures  of  social  unity  which 
give  a  charm  to  modern  socialism  even  if  the  clearness  of  the  picture 
is  dimmed  by  the  terror  of  the  immediate  struggle  that  is  to  bring 
them.  Socialism  is  thus  a  half-way  house  from  the  old  to  the  new. 
It  unites  the  beauty  of  what  is  to  come  with  an  emotional  awaken- 
ing evoked  by  past  conflicts.  To  look  both  ways  and  to  get  inspira- 
tion from  both  views  is  contradictory  but  effective.  Purely  Utopian 
reconstructions  do  not  arouse  vivid  motives  to  action.  Cosmopoli- 


94  THE  ANNALS  OF  THE  AMERICAN  ACADEMY 

tan  progress  and  utilitarian  measures  fail  because  they  evoke  no 
emotional  machinery  to  carry  men  toward  the  ends  they  seek.  A 
goal  less  vague  than  the  cosmopolitan  and  more  social  than  personal 
ends  must  be  outlined  before  sentiment  and  thought  can  direct 
activity  toward  new  ends  as  forcefully  as  the  old  ideals  did. 

I  reach  this  conclusion  by  assuming  that  surplus  promotes 
activity  and  that  activity  transforms  the  natural  surplus  into  wealth. 
With  wealth  come  price  relations  through  which  ancestral  control 
is  broken  and  wealth  control  put  in  its  place.  Price  relations  give 
rise  to  budgetary  concepts.  In  the  endeavor  to  bring  the  family 
budget  to  an  equilibrium,  activity  is  increased  and  consumption  is 
put  on  a  cultural  basis  by  increasing  the  intensity  of  new  wants. 
This  brings  on  a  self -repression  which  is  the  essence  of  character 
building.  The  struggle  for  supremacy  is  now  changed  from  a  race 
and  class  struggle  to  an  internal  struggle  for  self-control.  Primitive 
feelings  and  instincts  are  repressed,  sex  and  appetite  are  curbed, 
and  cultural  motives  replace  the  older  sentiments  due  to  race  and 
class  antagonisms. 

These  newer  struggles  are  growing  elements  in  English  and 
American  life.  A  higher  culture  will  result  that  makes  decisions 
individual  and  personal  rather  than  racial  and  class.  There  will 
be  no  unity  of  race,  of  language,  of  history  or  of  ancestral  tradition, 
but  there  will  be  a  new  type  of  men  forced  into  a  common  mode  of 
living  by  their  culture,  education  and  activity.  Such  a  civilization 
is  a  reality  among  the  English-speaking  peoples  and  its  spread  to 
other  races  and  regions  is  only  a  matter  of  time.  To  make  its  reality 
apparent,  and  to  give  it  an  emotional  force,  it  needs  a  name  which 
it  now  lacks,  for  the  many  nations  and  regions  to  which  it  has  spread 
keep  any  historic  name  from  being  appropriate.  To  call  it  English 
or  American  is  to  prevent  the  united  appeal  which  is  so  much  needed 
to  give  it  force.  Anglo-American  has  a  racial  limitation  that  must 
be  avoided.  As  a  mere  suggestion  that  may  lead  to  the  adoption  of 
some  appropriate  term,  I  offer  the  word  "Angloid,"  which  seems  to 
come  nearer  to  what  is  wanted  than  any  other  term.  It  implies 
a  heterogeneous  origin  and  thus  seems  weak,  but  this  weakness  is  a 
real  strength  as  it  permits  a  fusion  of  all  elements  making  for  a 
higher  civilization  and  an  energetic  personality.  The  unity  is  in  the 
type,  the  culture  and  in  the  resulting  character.  We  progress  not 
through  an  heredity  but  through  our  improved  environment. 


THE  RECONSTRUCTION  OF  ECONOMIC  THEORY  95 

With  or  without  a  name,  this  new  civilization  will  impress  itself 
more  deeply  on  the  coming  age.  The  new  and  the  old  types  of 
culture,  motive  and  character  are  bound  to  come  into  sharper  con- 
flict as  the  century  advances.  The  older  tendencies  are  coercive 
and  will  strive  to  impress  themselves  as  state  socialism.  The  newer 
forces  will  express  themselves  in  voluntary  association.  It  will  be 
a  struggle  of  tradition,  race  and  class  with  the  blending  influences 
that  make  for  unity  and  character.  The  history  of  the  coming  age 
will  be  a  chronicle  of  such  results  as  a  future  historian  can  describe 
better  than  an  economist  can  predict. 


INDEX 


Adventists,  the,  83. 

America,  application  of  English  theories 

to,  42;    double  origin  of  economics 

in,   13;    socialism  in,  7,  8;    types  of 

socialism  in,  26-30. 
American  economics,  4. 
American  thought,  2;    advance  of,  9; 

development  of,  4-8. 
Austrian  economists,  6. 

Bismarck,  14,  17. 

Budget,  52;  kinds  of,  55;  makers, 
small  producers  as,  54;  making, 
51-56. 

Budgetary  concepts,  growth  of,  57. 

Budgetary  pressure,  basis  of,  61; 
forces  increasing,  61;  in  distribu- 
tion, 62;  moral  effects  of,  62; 
tendencies  that  relieve,  61. 

Budgets,  family,  57-63. 

"Capital,"  Karl  Marx,  20,  24. 
Capital,     circulating,     67;      effect    of 

banking    upon,     66;      law    of,     38; 

loanable,  64,  65;    scarcity  of,  67. 
Capitalism,    26,    53;     and   profits,    11; 

large  scale,  28;    socialization  of,  27. 
Capitalist,  working,  44,  57. 
Carey,  H.  C.,  17,  32. 
Carver,  T.  N.,  84. 
Centralized  industry,  76. 
Chamberlain,     "Foundations    of    the 

Nineteenth  Century,"  32. 
Clark,  J.  B.,  4,  5. 
Classes,  basis  for,  1 8 ;  conflict  between, 

28,  32,  36;    in  society,  36;   origin  of 

social,  40. 

Communism,  agricultural,  27 
Competition,  54,  55;    decrease  of,  23; 

in  banking,  72;   increase  of,  44. 
Comte,  Auguste,  21. 


Consumption,  laws  of,  5. 
Continuity,  doctrine  of,  33. 
Cooperation,  promotion  of,  22. 
Cooperative  farm  colonies,  70. 
Cosmology,  contrasts  of  economic,  10; 
essentials  of  economic,  10. 

Democracy,  90;  and  socialism,  29; 
emotional,  11. 

Democrat,  the  progressive,  29;  the 
social,  11. 

"Development  of  English  Thought," 
S.  N.  Patten,  2. 

Devolution,  40,  83,  85. 

Diminishing  returns,  38,  40,  84. 

Distribution,  effect  of  budgetary  pres- 
sure in,  62;  failure  of  theories  of, 
36-40;  practical  applications  of  the 
theory  of,  47-50;  problem  of,  12; 
restatement  of  the  theory  of,  41- 
46;  social,  45;  theory  of,  21,  37, 
38,  45. 

Dogmatism,  74,  77. 

Economic  doctrines  discarded,  22. 

"Economic  Interpretation  of  History," 
E.  R.  A.  Seligman,  7,  13,  21. 

Economic  interpretation  of  history,  6, 
7,  9,  11,  34. 

Economic  monism,  4,  6,  9,  12. 

Economic  pluralism,  4,  6,  7,  9,  11. 

Economic  rights,  80. 

Economic  theory,  and  evolution,  20; 
and  Marx,  23;  German,  15. 

Economic  thought,  application  of  prag- 
matism to,  3;  basis  of  German,  32; 
basis  of  reconstructing,  12;  trans- 
formation of,  89. 

Economics,  American,  4;  difference 
between,  and  sociology,  5;  double 
origin  of  American,  13;  elements  in, 


(96) 


INDEX 


97 


92;  English,  2;  logical,  31;  revolu- 
tionary, 22;  scientific,  83. 

Economists,  Austrian,  6;  early,  10; 
orthodox,  16,  31. 

Economy,  agricultural,  36;  creative, 
92;  cultural,  36;  pain,  5,  9,  33, 
37,  92;  pleasure,  5,  9,  33,  37,  51, 
92;  price,  38;  slave,  36. 

England,  socialism  in,  7,  16. 

English  theory,  application  of,  to 
American  conditions,  42. 

Environment,  progress  through  im- 
proved, 94. 

Europe,  socialism  in,  7. 

Evolution,  40,  41,  84;  and  economic 
theory,  20;  industrial,  44. 

Family  budgets,  57-63. 

George,    Henry,     2;      "Progress    and 

Poverty,"  35. 
German    thought,    application    of,    to 

economics,  2;   effect  of,  on  students, 

2,  13,  14. 

German  revolution  of  1848,  20. 
Germany,  basis  of  economic  thought 

in,    32;     basis    of    progress    in,    14; 

economic  evolution  in,  2;    economic 

theory  in,  15;   socialism  in,  15. 
Giddings,  F.  H.,  4,  5. 

High  cost  of  living,  the,  64-69. 

High  prices,  effect  of  banking  upon, 
72. 

History,  economic  interpretation  of, 
6,  7,  9,  11,  34;  material  interpre- 
tation of,  9,  20;  sociological  inter- 
pretation of,  9. 

Income,  91;  equalization  of,  27;  forms 
of,  36;  personal,  59;  rise  in,  68; 
unearned,  38,  45;  vested,  59. 

Individualism,  86,  94. 

Industrial  centralization,  theory  of,  50. 

Industrial  evolution,  44. 

Industrial  life,  elements  in,  69. 


Industrial  morality,  basis  of,  62. 
Industry,  capitalistic,  1 1 ;    centralized, 

76;    modern,  18. 
Interest,  16,  38,  68,  72. 
Interstate      Commerce      Commission, 

views  of,  49. 

James,  William,  4. 

Labor,  and  wealth,  17;    organizations 

and  progress,  73. 
Living,  high  cost  of,  64-69. 
"Logic,"  J.  S.  Mill,  31. 
Logic  versus  sentiment,  14. 

Marshall,  A.,  6. 

Marx,  Karl,  2,  13,  24,  27,  39,  70,  71, 
84,  89;  and  economic  theory,  23; 
development  of,  20;  originality  of, 
22;  problem  of,  21;  service  of,  7, 
15;  the  economic,  19-25;  volume 
on  "Capital"  by,  20,  24. 

Material  interpretation  of  history,  9, 
20. 

Method,  problem  of,  12. 

Mill,  John  Stuart,  2,  6,  13,  14,  21  47, 
89;  interpretation  of,  31-35;  vol- 
ume by,  on  "Logic,"  31. 

Monism,  economic,  4,  5,  6,  9,  12. 

Monopoly,  38,  64. 

Morality,  basis  of  industrial,  62; 
current  economic,  30;  effects  of 
new,  62;  primitive,  61. 

Owen,  Robert,  22,  71. 

Pain  economy,  5,  9,  33,  37,  92. 
Philanthropy  and  social  sentiment,  28, 
Pleasure  economy,  5,  9,  33,  37,  51,  92. 
Pluralism,  economic,  4,  6,  7,  9,  11. 
Political  stability,  85,  89. 
Population,  law  of,  38. 
Pragmatism,  3,  5,  74,  77. 
Price  economy,  38. 
Prices,  law  of,  48;   rise  of,  37,  64. 
Production,    cost    of,    58;     effect    of 


98 


INDEX 


improved,  58;   large  scale,  54;    laws 

of,  5;  problem  of,  11. 
Profit  sharing,  27,  70. 
Profits,    15,    34,    41,    43,    51,    55,    60; 

and  capitalism,   11;    centralized,  44; 

distribution  of,  11;  equalization  of, 

11,  26,  27;    fall  in,  31;    in  England, 

14;      right    of    employers    to,     17; 

rise  in,  27;  theory  of,  21;  undivided, 

42. 
Progress,  and  labor  organizations,  73; 

law  of,  48;    measure  of,  36,  83-88; 

problem  of,  12;    tests  of  social,  87; 

theory  of,  50. 
"Progress  and  poverty,"  Henry  George, 

35. 

Progressive  democrat,  the,  29. 
Prosperity,  effect  of,  55,  58. 
Public  opinion,  1,  17,  48,  89. 

Rationalism,  3. 

Rent,  34,  38,  43,  45,  51,  55,  60. 
Ricardo,  David,  6,  14,  39,  84. 
Rogers,  Thorold,  6. 

Saving  and  wealth,  16,  42. 

Scientific  economics,  83. 

Seligman,  E.  R.  A.,  "Economic  Inter- 
pretation of  History,"  7,  13,  21. 

Sentiment  versus  logic,  14. 

Sex  freedom,  motives,  and  restraint,  30. 

Small,  Albion  W.,  21,  22;  "Socialism 
in  the  Light  of  Social  Science,"  13. 

Smith,  Adam,  21,  53,  64. 

Social  action,  70. 

Social  control,  90,  91;  kinds  of,  48; 
law  of,  48;  problem  of,  12. 

Social  democrat,  the,  11. 

Social  distribution,  45. 

Social  forces,  new  alignment  of,  43. 

Social  progress,  77,  87. 

Social  revolution,  26. 

Social  sentiment,  70. 

Social  surplus,  39,  45,  47. 

"Socialism  in  the  Light  of  Social 
Science,"  A.  W.  Small,  13. 


Socialism,  6,  27;  and  democracy,  29; 
and  sociology,  2 1 ;  and  surplus,  2 1 ; 
avoidance  of  state,  76-82;  collegiate, 
29,  30;  emotional,  11,  24;  growing 
influence  of,  7;  hero  of,  13; 
America,  7;  in  England,  7;  in 
Europe,  7;  in  Germany,  15; 
Marxian,  26;  modern,  93;  origin  of, 
13-18;  political,  46;  program  of, 
24;  scientific,  19,  22;  sentimental, 
8,  26;  sociological,  29;  state,  24, 
70,  75,  80,  81;  transformation  of, 
7;  trend  toward,  in  En  land,  16; 
types  of  American,  26-30;  unity  of, 
13;  voluntary,  26,  27,  28,  70-75,  76. 

Socialists,  American,  8;  early,  27; 
literary,  29;  sentimental,  7. 

Socialization  of  railroads,  73. 

Society,  classes  in,  36. 

Sociological  interpretation  of  history,  9. 

Sociological  socialism,  29. 

Sociology,  and  socialism,  21;  dffer- 
ence  between,  and  economics,  5, 
transformation  of,  21. 

State  ownership,  26. 

State  socialism,  70,  75,  80,  81;  avoid- 
ance of,  76-82. 

Statistical  wage,  39. 

Subsistence  fund,  45,  51. 

Subsistence  wage,  39. 

Super-profit,  42. 

Super-wage,  42,  43,  45. 

Surplus,  16,  17;  and  socialism,  21; 
social,  39,  45,  47;  undistributed, 
21. 

Surplus  value,  15,  21. 

Survival,  power  of,  63. 

Theorists,  deductive,  4. 
"Theory  of  Prosperity,"  S.  N.  Patten, 
1. 

Unearned  income,  38,  45. 
Unearned  increment,  34. 
Utility,  principles  of,  6. 
Utopists,  the,  29,  37. 


INDEX 


99 


Values,  53. 

Wage,  statistical,  39;    subsistence,  39; 

super,  42,  45. 
Wage  fund,  kinds  of,  39. 
Wages,  41,  46,  60,  68,  85;  iron  law  of, 


38;   rise  in,  38;  study  of  problem  of, 
6. 

Wealth,  47,  48;  and  labor,  17;  and 
saving,  16,  42;  creation  of,  11; 
redistribution  of,  46. 


"<««« 

M' 

CALIFORNW 


A    000  676881     6 


